Form 10-Q
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-8661

THE CHUBB CORPORATION

 

(Exact name of registrant as specified in its charter)

 

NEW JERSEY

 

13-2595722

(State or other jurisdiction of   (I. R. S. Employer
incorporation or organization)   Identification No.)

15 MOUNTAIN VIEW ROAD, WARREN, NEW JERSEY

 

07059

(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (908) 903-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES  x        NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES  x        NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x   Accelerated filer  ¨    Non-accelerated filer  ¨   Smaller reporting company  ¨
     (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES  ¨        NO  x

The number of shares of common stock outstanding as of September 30, 2015 was 227,055,872.


Table of Contents

THE CHUBB CORPORATION

INDEX

 

     Page Number  

Part I. Financial Information:

  

Item 1 — Financial Statements:

  

Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2015 and 2014

     1   

Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September  30, 2015 and 2014

     2   

Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

     3   

Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014

     4   

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

     5   

Notes to Consolidated Financial Statements

     6   

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

     21   

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

     58   

Item 4 — Controls and Procedures

     58   

Part II. Other Information:

  

Item 1 — Legal Proceedings

     59   

Item 1A — Risk Factors

     60   

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

     64   

Item 6 — Exhibits

     65   

Signatures

     65   

EX-31.1

  

EX-31.2

  

EX-32.1

  

EX-32.2

  

EX-101 INSTANCE DOCUMENT

  

EX-101 SCHEMA DOCUMENT

  

EX-101 CALCULATION LINKBASE DOCUMENT

  

EX-101 LABELS LINKBASE DOCUMENT

  

EX-101 PRESENTATION LINKBASE DOCUMENT

  

EX-101 DEFINITION LINKBASE DOCUMENT

  


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Page 1

Part I. FINANCIAL INFORMATION

Item 1 — Financial Statements

THE CHUBB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

PERIODS ENDED SEPTEMBER 30

(in millions)

 

     Third Quarter      Nine Months  
     2015     2014      2015     2014  

Revenues

         

Premiums Earned

   $   3,166      $   3,119       $   9,404      $   9,212   

Investment Income

     328        344         1,001        1,053   

Other Revenues

     2        1         6        6   

Realized Investment Gains (Losses), Net

         

Total Other-Than-Temporary Impairment Losses on Investments

     (26             (49     (5

Other Realized Investment Gains, Net

     108        110         162        356   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Realized Investment Gains, Net

     82        110         113        351   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Revenues

     3,578        3,574         10,524        10,622   
  

 

 

   

 

 

    

 

 

   

 

 

 

Losses and Expenses

         

Losses and Loss Expenses

     1,633        1,679         5,260        5,316   

Amortization of Deferred Policy Acquisition Costs

     663        644         1,941        1,896   

Other Insurance Operating Costs and Expenses

     349        357         1,049        1,079   

Investment Expenses

     13        12         36        32   

Other Expenses

     4        4         10        14   

Corporate Expenses

     69        60         221        186   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Losses and Expenses

     2,731        2,756         8,517        8,523   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income Before Federal and Foreign Income Tax

     847        818         2,007        2,099   

Federal and Foreign Income Tax

     246        224         537        557   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

   $ 601      $ 594       $ 1,470      $ 1,542   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income Per Share

         

Basic

   $ 2.62      $ 2.47       $ 6.36      $ 6.30   

Diluted

     2.60        2.47         6.33        6.28   

Dividends Declared Per Share

     .57        .50         1.71        1.50   

See Notes to Consolidated Financial Statements.


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Page 2

THE CHUBB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

PERIODS ENDED SEPTEMBER 30

(in millions)

 

     Third Quarter     Nine Months  
     2015     2014     2015     2014  

Net Income

   $ 601      $ 594      $ 1,470      $ 1,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

        

Change in Unrealized Appreciation of Investments

     (19     (46     (285     427   

Change in Postretirement Benefit Costs Not Yet Recognized in Net Income

     11        6        35        17   

Foreign Currency Translation Losses

     (38     (26     (199     (41
  

 

 

   

 

 

   

 

 

   

 

 

 
     (46     (66     (449     403   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 555      $ 528      $ 1,021      $ 1,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.


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Page 3

THE CHUBB CORPORATION

CONSOLIDATED BALANCE SHEETS

(in millions)

 

     September 30     December 31  
     2015     2014  

Assets

    

Invested Assets

    

Short Term Investments

   $ 3,052      $ 1,318   

Fixed Maturities (cost $35,469 and $36,958)

     37,016        38,780   

Equity Securities (cost $1,060 and $1,089)

     1,771        1,964   

Other Invested Assets

     1,422        1,423   
  

 

 

   

 

 

 

TOTAL INVESTED ASSETS

     43,261        43,485   

Cash

     53        47   

Accrued Investment Income

     403        410   

Premiums Receivable

     2,480        2,560   

Reinsurance Recoverable on Unpaid Losses and Loss Expenses

     1,505        1,639   

Prepaid Reinsurance Premiums

     257        256   

Deferred Policy Acquisition Costs

     1,302        1,284   

Deferred Income Tax

     120          

Goodwill

     467        467   

Other Assets

     1,344        1,138   
  

 

 

   

 

 

 

TOTAL ASSETS

   $   51,192      $   51,286   
  

 

 

   

 

 

 

Liabilities

    

Unpaid Losses and Loss Expenses

   $ 22,359      $ 22,678   

Unearned Premiums

     6,636        6,581   

Long Term Debt

     3,300        3,300   

Dividend Payable to Shareholders

     130        117   

Deferred Income Tax

            15   

Accrued Expenses and Other Liabilities

     2,396        2,299   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     34,821        34,990   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Common Stock - $1 Par Value; 371,980,460 Shares

     372        372   

Paid-In Surplus

     179        171   

Retained Earnings

     24,596        23,520   

Accumulated Other Comprehensive Income

     661        1,110   

Treasury Stock, at Cost - 144,924,588 and 139,551,071 Shares

     (9,437     (8,877
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     16,371        16,296   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 51,192      $ 51,286   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.


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Page 4

THE CHUBB CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30

(in millions)

 

     2015     2014  

Common Stock

    

Balance, Beginning of Year and End of Period

   $ 372      $ 372   
  

 

 

   

 

 

 

Paid-In-Surplus

    

Balance, Beginning of Year

     171        171   

Changes Related to Stock-Based Employee Compensation (includes tax benefit of $4 and $16)

     8        (20
  

 

 

   

 

 

 

Balance, End of Period

     179        151   
  

 

 

   

 

 

 

Retained Earnings

    

Balance, Beginning of Year

     23,520        21,902   

Net Income

     1,470        1,542   

Dividends Declared (per share $1.71 and $1.50)

     (394     (365
  

 

 

   

 

 

 

Balance, End of Period

     24,596        23,079   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Unrealized Appreciation of Investments Including Unrealized Other-Than-Temporary Impairment Losses

    

Balance, Beginning of Year

     1,753        1,225   

Change During Period, Net of Tax

     (285     427   
  

 

 

   

 

 

 

Balance, End of Period

     1,468        1,652   
  

 

 

   

 

 

 

Postretirement Benefit Costs Not Yet Recognized in Net Income

    

Balance, Beginning of Year

     (589     (253

Change During Period, Net of Tax

     35        17   
  

 

 

   

 

 

 

Balance, End of Period

     (554     (236
  

 

 

   

 

 

 

Foreign Currency Translation Gains (Losses)

    

Balance, Beginning of Year

     (54     63   

Change During Period, Net of Tax

     (199     (41
  

 

 

   

 

 

 

Balance, End of Period

     (253     22   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income, End of Period

     661        1,438   
  

 

 

   

 

 

 

Treasury Stock, at Cost

    

Balance, Beginning of Year

     (8,877     (7,383

Repurchase of Shares

     (604     (1,209

Shares Issued Under Stock-Based Employee Compensation Plans

     44        58   
  

 

 

   

 

 

 

Balance, End of Period

     (9,437     (8,534
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

   $   16,371      $   16,506   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.


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Page 5

THE CHUBB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30

(in millions)

 

     2015     2014  

Cash Flows from Operating Activities

    

Net Income

   $ 1,470      $ 1,542   

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

    

Increase in Unpaid Losses and Loss Expenses, Net

     176        151   

Increase in Unearned Premiums, Net

     182        242   

Change in Income Tax Payable or Recoverable

     (45     163   

Deferred Income Tax

     107        66   

Amortization of Premiums and Discounts on Fixed Maturities

     173        143   

Depreciation

     39        41   

Realized Investment Gains, Net

     (113     (351

Other, Net

     (32     (78
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     1,957        1,919   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Proceeds from Fixed Maturities

    

Sales

     3,197        3,243   

Maturities, Calls and Redemptions

     3,207                 3,162   

Proceeds from Sales of Equity Securities

     94        199   

Purchases of Fixed Maturities

             (5,683     (7,517)   

Purchases of Equity Securities

     (48     (109

Investments in Other Invested Assets, Net

     74        189   

Decrease (Increase) in Short Term Investments, Net

     (1,757     56   

Change in Receivable or Payable from Security Transactions Not Settled, Net

     14        457   

Purchases of Property and Equipment, Net

     (54     (44
  

 

 

   

 

 

 

Net Cash Used in Investing Activities

     (956     (364
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Decrease in Funds Held Under Deposit Contracts

     (3     (2

Proceeds from Issuance of Common Stock Under Stock-Based Employee Compensation Plans

     13        18   

Repurchase of Shares

     (624     (1,210

Dividends Paid to Shareholders

     (381     (356
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (995     (1,550
  

 

 

   

 

 

 

Net Increase in Cash

     6        5   

Cash at Beginning of Year

     47        52   
  

 

 

   

 

 

 

Cash at End of Period

   $ 53      $ 57   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.


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Page 6

THE CHUBB CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1) General

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and include the accounts of The Chubb Corporation (Chubb) and its subsidiaries (collectively, the Corporation). Significant intercompany transactions have been eliminated in consolidation.

The amounts included in this report are unaudited but include those adjustments, consisting of normal recurring items, that management considers necessary for a fair presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Notes to Consolidated Financial Statements included in Chubb’s Annual Report on Form 10-K for the year ended December 31, 2014.

2) Merger Agreement with ACE Limited

On June 30, 2015, Chubb entered into an Agreement and Plan of Merger (Merger Agreement) with ACE Limited (ACE), a company organized under the laws of Switzerland, and William Investment Holdings Corporation (Merger Sub), a New Jersey corporation and a wholly owned indirect subsidiary of ACE, pursuant to which Merger Sub will merge with and into Chubb, with Chubb surviving as a wholly owned indirect subsidiary of ACE (the Merger). ACE has indicated that shortly after the completion of the Merger, it expects to merge Chubb with and into ACE INA Holdings Inc., a Delaware corporation and indirect subsidiary of ACE, with ACE INA Holdings Inc. continuing as the surviving corporation.

At the effective time of the Merger, each share (except for certain shares held by ACE, Chubb or their subsidiaries) of common stock of Chubb, par value $1.00 per share, will be converted into the right to receive 0.6019 of a common share of ACE, par value CHF 24.15 per share, and $62.93 in cash.

The Board of Directors of Chubb (the Board) unanimously approved the Merger Agreement and the transactions contemplated thereby, including the Merger. The closing of the Merger is subject to various customary conditions, including receipt of required insurance regulatory and other governmental approvals. Some other closing conditions have already been satisfied, including Chubb shareholder approval of the Merger Agreement, approval by ACE shareholders of certain Merger-related matters and the termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The transaction is expected to close during the first quarter of 2016.

The Merger Agreement contains certain termination rights for both Chubb and ACE and further provides that, upon termination under specified circumstances, Chubb would be required to pay to ACE a termination fee of $930 million. No such termination fee has been accrued as of September 30, 2015.


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Page 7

Pursuant to the Merger Agreement, until the effective time of the Merger or termination of the Merger Agreement, the Corporation is required to conduct its business in the ordinary course in all material respects and, without the prior written consent of ACE, cannot take certain actions, except in each case as permitted pursuant to the Merger Agreement.

3) Accounting Pronouncements Not Yet Adopted

In February 2015, the Financial Accounting Standards Board issued updated guidance that amends certain aspects of the current consolidation accounting guidance. In particular, the new guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities and eliminates the presumption that a general partner should consolidate a limited partnership. The new guidance would be effective for the Corporation for the year beginning January 1, 2016. The Corporation is in the process of assessing the effect, if any, that the implementation of this guidance will have on its financial position and results of operations.


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Page 8

4) Invested Assets

(a) The amortized cost and fair value of fixed maturities and equity securities were as follows:

 

     September 30, 2015  
     Amortized
Cost
     Gross
Unrealized
Appreciation
     Gross
Unrealized
Depreciation
     Fair
Value
 
     (in millions)  

Fixed maturities

           

Tax exempt

   $ 18,890       $ 1,012       $ 29       $ 19,873   
  

 

 

    

 

 

    

 

 

    

 

 

 

Taxable

           

U.S. government and government agency and authority obligations

     1,259         54         1         1,312   

Corporate bonds

     8,409         260         45         8,624   

Foreign government and government agency obligations

     5,858         269         5         6,122   

Residential mortgage-backed securities

     110         15         1         124   

Commercial mortgage-backed securities

     943         19         1         961   
  

 

 

    

 

 

    

 

 

    

 

 

 
     16,579         617         53         17,143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $  35,469       $  1,629       $   82       $    37,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 1,060       $ 742       $ 31       $ 1,771   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Appreciation
     Gross
Unrealized
Depreciation
     Fair
Value
 
     (in millions)  

Fixed maturities

           

Tax exempt

   $ 18,614       $ 1,174       $ 16       $ 19,772   
  

 

 

    

 

 

    

 

 

    

 

 

 

Taxable

           

U.S. government and government agency and authority obligations

     1,962         46         1         2,007   

Corporate bonds

     8,741         327         40         9,028   

Foreign government and government agency obligations

     6,380         295         3         6,672   

Residential mortgage-backed securities

     192         20         1         211   

Commercial mortgage-backed securities

     1,069         22         1         1,090   
  

 

 

    

 

 

    

 

 

    

 

 

 
     18,344         710         46         19,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $  36,958       $  1,884       $   62       $    38,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

   $ 1,089       $ 894       $ 19       $ 1,964   
  

 

 

    

 

 

    

 

 

    

 

 

 


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Page 9

The fair value and amortized cost of fixed maturities at September 30, 2015 by contractual maturity were as follows:

 

     Fair
Value
     Amortized
Cost
 
     (in millions)  

Due in one year or less

   $ 2,193       $ 2,174   

Due after one year through five years

     11,621         11,173   

Due after five years through ten years

     13,722         13,032   

Due after ten years

     8,395         8,037   
  

 

 

    

 

 

 
     35,931         34,416   

Residential mortgage-backed securities

     124         110   

Commercial mortgage-backed securities

     961         943   
  

 

 

    

 

 

 
   $  37,016       $  35,469   
  

 

 

    

 

 

 

Actual maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations.

The Corporation’s equity securities comprise a diversified portfolio of primarily U.S. publicly-traded common stocks.

The Corporation is involved in the normal course of business with VIEs primarily as a passive investor in residential mortgage-backed securities, commercial mortgage-backed securities and private equity limited partnerships issued by third party VIEs. The Corporation is not the primary beneficiary of these VIEs. The Corporation’s maximum exposure to loss with respect to these investments is limited to the investment carrying values included in the Corporation’s consolidated balance sheet and any unfunded partnership commitments.

(b) The components of unrealized appreciation or depreciation, including unrealized other-than-temporary impairment losses, of investments carried at fair value were as follows:

 

     September 30
2015
     December 31
2014
 
     (in millions)  

Fixed maturities

     

Gross unrealized appreciation

   $  1,629       $  1,884   

Gross unrealized depreciation

     82         62   
  

 

 

    

 

 

 
     1,547         1,822   
  

 

 

    

 

 

 

Equity securities

     

Gross unrealized appreciation

     742         894   

Gross unrealized depreciation

     31         19   
  

 

 

    

 

 

 
     711         875   
  

 

 

    

 

 

 
     2,258         2,697   

Deferred income tax liability

     790         944   
  

 

 

    

 

 

 
   $ 1,468       $ 1,753   
  

 

 

    

 

 

 


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Page 10

The following table summarizes, for all investment securities in an unrealized loss position at September 30, 2015, the aggregate fair value and gross unrealized depreciation, including unrealized other-than-temporary impairment losses, by investment category and length of time that individual securities have continuously been in an unrealized loss position.

 

     Less Than 12 Months      12 Months or More      Total  
     Fair
Value
     Gross
Unrealized
Depreciation
     Fair
Value
     Gross
Unrealized
Depreciation
     Fair
Value
     Gross
Unrealized
Depreciation
 
     (in millions)  

Fixed maturities

                 

Tax exempt

   $ 1,287       $ 16       $ 249       $ 13       $ 1,536       $ 29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Taxable

                 

U.S. government and government agency and authority obligations

     52         1         10                 62         1   

Corporate bonds

     1,695         30         441         15         2,136         45   

Foreign government and government agency obligations

     430         3         125         2         555         5   

Residential mortgage-backed securities

                     5         1         5         1   

Commercial mortgage-backed securities

     47         1         32                 79         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,224         35         613         18         2,837         53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     3,511         51         862         31         4,373         82   

Equity securities

     138         27         8         4         146         31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $   3,649       $   78       $   870       $   35       $   4,519       $   113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2015, approximately 1,125 individual fixed maturities and 25 individual equity securities were in an unrealized loss position. The Corporation does not have the intent to sell and it is not more likely than not that the Corporation will be required to sell these fixed maturities before the securities recover to their amortized cost value. In addition, the Corporation believes that none of the declines in the fair values of these fixed maturities relate to credit losses. The Corporation has the intent and ability to hold the equity securities in an unrealized loss position for a period of time sufficient to allow for the recovery of cost. The Corporation believes that none of the declines in the fair value of these fixed maturities and equity securities were other than temporary at September 30, 2015.


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The following table summarizes, for all investment securities in an unrealized loss position at December 31, 2014, the aggregate fair value and gross unrealized depreciation, including unrealized other-than-temporary impairment losses, by investment category and length of time that individual securities have continuously been in an unrealized loss position.

 

     Less Than 12 Months      12 Months or More      Total  
     Fair
Value
     Gross
Unrealized

Depreciation
     Fair
Value
     Gross
Unrealized

Depreciation
     Fair
Value
     Gross
Unrealized
Depreciation
 
     (in millions)  

Fixed maturities

                 

Tax exempt

   $ 422       $ 3       $ 305       $ 13       $ 727       $ 16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Taxable

                 

U.S. government and government agency and authority obligations

     936         1         36                 972         1   

Corporate bonds

     1,327         23         888         17         2,215         40   

Foreign government and government agency obligations

     318         1         207         2         525         3   

Residential mortgage-backed securities

                     7         1         7         1   

Commercial mortgage-backed securities

     106                 67         1         173         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,687         25         1,205         21         3,892         46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     3,109         28         1,510         34         4,619         62   

Equity securities

     67         11         11         8         78         19   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $   3,176       $   39       $   1,521       $   42       $   4,697       $   81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The change in unrealized appreciation or depreciation of investments carried at fair value, including the change in unrealized other-than-temporary impairment losses, was as follows:

 

     Periods Ended September 30  
     Third Quarter     Nine Months  
         2015             2014             2015             2014      
     (in millions)  

Change in unrealized appreciation of fixed maturities

   $ 134      $ 2      $ (275   $ 619   

Change in unrealized appreciation of equity securities

     (163     (73     (164     37   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (29     (71     (439     656   

Deferred income tax (credit)

     (10     (25     (154     229   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (19   $ (46   $ (285   $ 427   
  

 

 

   

 

 

   

 

 

   

 

 

 


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(c) Realized investment gains and losses were as follows:

 

     Periods Ended September 30  
     Third Quarter     Nine Months  
     2015     2014     2015     2014  
           (in millions)        

Fixed maturities

        

Gross realized gains

   $ 20      $ 27      $ 50      $ 104   

Gross realized losses

     (5     (5     (23     (33

Other-than-temporary impairment losses

     (11            (12     (4
  

 

 

   

 

 

   

 

 

   

 

 

 
     4        22        15        67   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

        

Gross realized gains

     42        43        58        132   

Other-than-temporary impairment losses

     (15            (37     (1
  

 

 

   

 

 

   

 

 

   

 

 

 
     27        43        21        131   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets

     51        45        77        153   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $     82      $      110      $     113      $      351   
  

 

 

   

 

 

   

 

 

   

 

 

 

(d) As of September 30, 2015 and December 31, 2014, fixed maturities still held by the Corporation for which a portion of their other-than-temporary impairment losses were recognized in other comprehensive income had cumulative credit-related losses of $16 million and $18 million, respectively, recognized in net income.

5) Comprehensive Income

Comprehensive income is defined as all changes in shareholders’ equity, except those arising from transactions with shareholders. Comprehensive income includes net income and other comprehensive income or loss, which for the Corporation consists of changes in unrealized appreciation or depreciation of investments carried at fair value, changes in unrealized other-than-temporary impairment losses of fixed maturities, changes in postretirement benefit costs not yet recognized in net income and changes in foreign currency translation gains or losses.


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The components of other comprehensive income or loss were as follows:

 

     Periods Ended September 30, 2015  
     Third Quarter     Nine Months  
     Before
Tax
    Income
Tax
    Net of
Tax
    Before
Tax
    Income
Tax
    Net of
Tax
 
     (in millions)  

Net unrealized holding gains (losses) arising during the period

   $ 2      $ 1      $ 1      $ (403   $ (141   $ (262

Reclassification adjustment for net realized gains included in net income

     31        11        20        36        13        23   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized losses recognized in other comprehensive loss

     (29     (10     (19     (439     (154     (285
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Postretirement benefit gain not yet recognized in net income arising during the period

     2               2        7        2        5   

Reclassification adjustment for the amortization of net actuarial loss and prior service cost included in net income (a)

     (15     (6     (9     (47     (17     (30
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in postretirement benefit costs not yet recognized in net income

     17        6        11        54        19        35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation losses

     (58     (20     (38     (305     (106     (199
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

   $ (70   $ (24   $ (46   $ (690   $ (241   $ (449
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Periods Ended September 30, 2014  
     Third Quarter     Nine Months  
     Before
Tax
    Income
Tax
    Net of
Tax
    Before
Tax
    Income
Tax
    Net of
Tax
 
     (in millions)  

Net unrealized holding gains (losses) arising during the period

   $ (6   $ (3   $ (3   $ 854      $ 298      $ 556   

Reclassification adjustment for net realized gains included in net income

     65        22        43        198        69        129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) recognized in other comprehensive income or loss

     (71     (25     (46     656        229        427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Postretirement benefit gain not yet recognized in net income arising during the period

     1               1        1               1   

Reclassification adjustment for the amortization of net actuarial loss and prior service cost included in net income (a)

     (9     (4     (5     (26     (10     (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in postretirement benefit costs not yet recognized in net income

     10        4        6        27        10        17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation losses

     (40     (14     (26     (62     (21     (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ (101   $ (35   $ (66   $ 621      $ 218      $ 403   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(a) Postretirement benefit costs recognized in net income during the period are included among several of the loss and expense components presented in the consolidated statements of income.


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6) Segments Information

The principal business of the Corporation is the sale of property and casualty insurance. The profitability of the property and casualty insurance business depends on the results of both underwriting operations and investments, which are viewed as two distinct operations. The underwriting operations are managed and evaluated separately from the investment function.

The property and casualty insurance subsidiaries underwrite most lines of property and casualty insurance. Underwriting operations consist of four separate business units: personal insurance, commercial insurance, specialty insurance and reinsurance assumed. The personal segment targets the personal insurance market. The personal classes include automobile, homeowners and other personal coverages. The commercial segment includes those classes of business that are generally available in broad markets and are of a more commodity nature. Commercial classes include multiple peril, casualty, workers’ compensation and property and marine. The specialty segment includes those classes of business that are available in more limited markets since they require specialized underwriting and claim settlement. Specialty classes include professional liability coverages and surety. The reinsurance assumed business has been in runoff since the transfer of the ongoing reinsurance assumed business to a reinsurance company in 2005.

Corporate and other includes investment income earned on corporate invested assets, corporate expenses and the results of the Corporation’s non-insurance subsidiaries.


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Revenues and income before income tax of each operating segment were as follows:

 

     Periods Ended September 30  
     Third Quarter     Nine Months  
     2015     2014     2015     2014  
     (in millions)  

Revenues

        

Property and casualty insurance

        

Premiums earned

        

Personal insurance

   $     1,114      $     1,118      $     3,364      $     3,296   

Commercial insurance

     1,390        1,338        4,077        3,943   

Specialty insurance

     662        663        1,964        1,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance

     3,166        3,119        9,405        9,211   

Reinsurance assumed

                   (1     1   
  

 

 

   

 

 

   

 

 

   

 

 

 
     3,166        3,119        9,404        9,212   

Investment income

     322        338        982        1,034   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property and casualty insurance

     3,488        3,457        10,386        10,246   

Corporate and other

     8        7        25        25   

Realized investment gains, net

     82        110        113        351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 3,578      $ 3,574      $ 10,524      $ 10,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax

        

Property and casualty insurance

        

Underwriting

        

Personal insurance

   $ 154      $ 141      $ 213      $ 188   

Commercial insurance

     207        151        446        333   

Specialty insurance

     161        133        448        355   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance

     522        425        1,107        876   

Reinsurance assumed

     4               7        1   
  

 

 

   

 

 

   

 

 

   

 

 

 
     526        425        1,114        877   

Increase (decrease) in deferred policy acquisition costs

     (1     14        44        48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting income

     525        439        1,158        925   

Investment income

     310        327        949        1,004   

Other charges

     (4            (4     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total property and casualty insurance

     831        766        2,103        1,925   

Corporate and other

     (66     (58     (209     (177

Realized investment gains, net

     82        110        113        351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total income before income tax

   $ 847      $ 818      $ 2,007      $ 2,099   
  

 

 

   

 

 

   

 

 

   

 

 

 


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7) Fair Values of Financial Instruments

Fair values of financial instruments are determined by management using valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Fair values are generally measured using quoted prices in active markets for identical assets or liabilities or other inputs, such as quoted prices for similar assets or liabilities, that are observable, either directly or indirectly. In those instances where observable inputs are not available, fair values are measured using unobservable inputs for the asset or liability. Unobservable inputs reflect the Corporation’s own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. Fair value estimates derived from unobservable inputs are affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. The derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements.

The methods and assumptions used to estimate the fair values of financial instruments are as follows:

 

  (i) The carrying value of short term investments approximates fair value due to the short maturities of these investments.

 

  (ii) Fair values of fixed maturities are determined by management, utilizing prices obtained from a third party, nationally recognized pricing service or, in the case of securities for which prices are not provided by a pricing service, from third party brokers. For fixed maturities that have quoted prices in active markets, market quotations are provided. For fixed maturities that do not trade on a daily basis, the pricing service and brokers provide fair value estimates using a variety of inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, bids, offers, reference data, prepayment rates and measures of volatility. Management reviews on an ongoing basis the reasonableness of the methodologies used by the relevant pricing service and brokers. In addition, management, using the prices received for the securities from the pricing service and brokers, determines the aggregate portfolio price performance and reviews it against applicable indices. If management believes that significant discrepancies exist, it will discuss these with the relevant pricing service or broker to resolve the discrepancies.

 

  (iii) Fair values of equity securities are determined by management, utilizing quoted market prices.

 

  (iv) Fair values of long term debt issued by Chubb are determined by management, utilizing prices obtained from a third party, nationally recognized pricing service.


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The carrying values and fair values of financial instruments were as follows:

 

     September 30, 2015      December 31, 2014  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 
     (in millions)  

Assets

           

Invested assets

           

Short term investments

   $ 3,052       $ 3,052       $ 1,318       $ 1,318   

Fixed maturities

       37,016           37,016           38,780           38,780   

Equity securities

     1,771         1,771         1,964         1,964   

Liabilities

           

Long term debt

     3,300         3,788         3,300         4,013   

At September 30, 2015 and December 31, 2014, a pricing service provided fair value amounts for approximately 99% of the Corporation’s fixed maturities. The prices obtained from a pricing service and brokers generally are non-binding, but are reflective of current market transactions in the applicable financial instruments.

At September 30, 2015 and December 31, 2014, the Corporation held an insignificant amount of financial instruments in its investment portfolio for which a lack of market liquidity impacted the determination of fair value.

The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:

Level 1 – Unadjusted quoted prices in active markets for identical financial instruments.

Level 2 – Other inputs that are observable for the financial instrument, either directly or indirectly.

Level 3 – Significant unobservable inputs.


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The fair value of financial instruments categorized based upon the lowest level of input that was significant to the fair value measurement was as follows:

 

     September 30, 2015  
     Level 1      Level 2      Level 3      Total  
     (in millions)  

Assets

           

Short term investments

   $ 277       $ 2,775       $       $ 3,052   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturities

           

Tax exempt

             19,871         2         19,873   
  

 

 

    

 

 

    

 

 

    

 

 

 

Taxable

           

U.S. government and government agency and authority obligations

             1,312                 1,312   

Corporate bonds

             8,431         193         8,624   

Foreign government and government agency obligations

             6,122                 6,122   

Residential mortgage-backed securities

             122         2         124   

Commercial mortgage-backed securities

             961                 961   
  

 

 

    

 

 

    

 

 

    

 

 

 
             16,948         195         17,143   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

             36,819         197         37,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

     1,765                 6         1,771   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,042       $ 39,594       $ 203       $ 41,839   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Long term debt

   $       $ 3,788       $       $ 3,788   
  

 

 

    

 

 

    

 

 

    

 

 

 


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Page 19

     December 31, 2014  
     Level 1      Level 2      Level 3      Total  
     (in millions)  

Assets

           

Short term investments

   $ 206       $ 1,112       $       $ 1,318   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturities

           

Tax exempt

             19,769         3         19,772   
  

 

 

    

 

 

    

 

 

    

 

 

 

Taxable

           

U.S. government and government agency and authority obligations

             2,007                 2,007   

Corporate bonds

             8,912         116         9,028   

Foreign government and government agency obligations

             6,663         9         6,672   

Residential mortgage-backed securities

             210         1         211   

Commercial mortgage-backed securities

             1,090                 1,090   
  

 

 

    

 

 

    

 

 

    

 

 

 
             18,882         126         19,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

             38,651         129         38,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

     1,958                 6         1,964   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $     2,164       $   39,763       $         135       $   42,062   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Long term debt

   $       $ 4,013       $       $ 4,013   
  

 

 

    

 

 

    

 

 

    

 

 

 


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8) Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

 

     Periods Ended September 30  
     Third Quarter      Nine Months  
     2015      2014      2015      2014  
    

(in millions, except for per

share amounts)

 

Basic earnings per share:

           

Net income

   $ 601       $ 594       $ 1,470       $ 1,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     229.4         240.2         231.2         244.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 2.62       $ 2.47       $ 6.36       $ 6.30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share:

           

Net income

   $ 601       $ 594       $ 1,470       $ 1,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     229.4         240.2         231.2         244.8   

Additional shares from assumed issuance of shares under stock-based compensation awards

     1.7         .4         .9         .6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares and potential shares assumed outstanding for computing diluted earnings per share

     231.1         240.6         232.1         245.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 2.60       $ 2.47       $ 6.33       $ 6.28   
  

 

 

    

 

 

    

 

 

    

 

 

 


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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) addresses the financial condition of the Corporation as of September 30, 2015 compared with December 31, 2014 and the results of operations for the nine months and three months ended September 30, 2015 and 2014. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes contained in this report and the consolidated financial statements and related notes and management’s discussion and analysis of financial condition and results of operations included in Chubb’s Annual Report on Form 10-K for the year ended December 31, 2014. References to “we,” “us” and “our” appearing in the Form 10-Q should be read as referring to the Corporation.

Cautionary Statement Regarding Forward-Looking Information

Certain statements in this document are “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 (PSLRA). These forward-looking statements are made pursuant to the safe harbor provisions of the PSLRA and include statements regarding the pending acquisition of Chubb by ACE Limited (ACE) discussed below; the payment by Chubb and its property and casualty subsidiaries of dividends that may be used in connection with ACE’s funding of the cash consideration to be paid to Chubb shareholders in connection with the acquisition of Chubb by ACE discussed below; our loss reserve and reinsurance recoverable estimates; market conditions affecting us and our competitors in 2015, including premium volume, rate trends, pricing and competition; the cost of our property reinsurance program in 2015; property and casualty investment income; cash flows generated by our investments; our limited partnership investments; and our financial position, capital adequacy and funding of liquidity needs. Forward-looking statements frequently can be identified by words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “will,” “may,” “should,” “could,” “would,” “likely,” “estimate,” “predict,” “potential,” “continue,” or other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning trends and future developments and their potential effects on us. These statements are not guarantees of future performance. Actual results may differ materially from those suggested by forward-looking statements as a result of risks and uncertainties, which include, among others, those discussed or identified in our Annual Report on Form 10-K for the year ended December 31, 2014 and from time to time in our other public filings with the Securities and Exchange Commission and those associated with:

 

 

the ability of Chubb or ACE to satisfy the conditions to the closing of the pending acquisition or the length of time required to do so;

 

 

global political, economic and market conditions, particularly in the jurisdictions in which we operate and/or invest, including:

 

  changes in credit ratings, interest rates, market credit spreads and the performance of the financial markets;

 

  currency fluctuations;

 

  the effects of inflation;

 

  changes in domestic and foreign laws, regulations and taxes;

 

  changes in competition and pricing environments;

 

  regional or general changes in asset valuations;

 

  the inability to reinsure certain risks economically; and

 

  changes in the litigation environment;


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the effects of the outbreak or escalation of war or hostilities;

 

 

the occurrence of terrorist attacks, including any nuclear, biological, chemical or radiological events;

 

 

premium pricing and profitability or growth estimates overall or by lines of business or geographic area, and related expectations with respect to the timing and terms of any required regulatory approvals;

 

 

adverse changes in loss cost trends;

 

 

our ability to retain existing business and attract new business at acceptable rates;

 

 

our expectations with respect to cash flow and investment income and with respect to other income;

 

 

the adequacy of our loss reserves, including:

 

  our expectations relating to reinsurance recoverables;

 

  the willingness of parties, including us, to settle disputes;

 

  developments in judicial decisions or regulatory or legislative actions relating to coverage and liability, in particular, for asbestos, toxic waste and other mass tort claims;

 

  development of new theories of liability;

 

  our estimates relating to ultimate asbestos liabilities; and

 

  the impact from the bankruptcy protection sought by various asbestos producers and other related businesses;

 

 

the availability and cost of reinsurance coverage;

 

 

the occurrence of significant weather-related or other natural or human-made disasters, particularly in locations where we have concentrations of risk or changes to our estimates (or the assessments of rating agencies and other third parties) of our potential exposure to such events;

 

 

the impact of economic factors on companies on whose behalf we have issued surety bonds, and in particular, on those companies that file for bankruptcy or otherwise experience deterioration in creditworthiness;

 

 

the effects of disclosures by, and investigations of, companies we insure, particularly with respect to our lines of business that have a longer time span, or tail, between the incidence of a loss and the settlement of the claim;

 

 

the impact of legislative, regulatory, judicial and similar developments on companies we insure, particularly with respect to our longer tail lines of business;

 

 

the impact of legislative, regulatory, judicial and similar developments on our business, including those relating to insurance industry reform, terrorism, catastrophes, the financial markets, solvency standards, capital requirements, accounting guidance and taxation;


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any downgrade in our claims-paying, financial strength or other credit ratings;

 

 

the ability of our subsidiaries to pay us dividends;

 

 

our ability and the ability of our third party vendors to maintain the availability of systems and safeguard the security of our data in the event of a disaster or other information security incident; and

 

 

our ability to implement management’s strategic plans and initiatives.

Chubb assumes no obligation to update any forward-looking statement set forth in this document, which speak as of the date hereof.

Critical Accounting Estimates and Judgments

The consolidated financial statements include amounts based on informed estimates and judgments of management for transactions that are not yet complete. Such estimates and judgments affect the reported amounts in the financial statements. Those estimates and judgments that were most critical to the preparation of the financial statements involved the determination of loss reserves and the recoverability of related reinsurance recoverables and the evaluation of whether a decline in value of any investment is temporary or other than temporary. These estimates and judgments, which are discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014 as supplemented within the following analysis of our results of operations, require the use of assumptions about matters that are highly uncertain and therefore are subject to change as facts and circumstances develop. If different estimates and judgments had been applied, materially different amounts might have been reported in the financial statements.


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Overview

The following highlights do not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to Chubb’s shareholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

 

Net income was $1.47 billion in the first nine months of 2015 and $601 million in the third quarter compared with $1.54 billion and $594 million, respectively, in the same periods of 2014. The lower net income in the first nine months of 2015 compared to the same period of 2014 was due to lower net realized investment gains, offset in part by higher operating income. The higher net income in the third quarter of 2015 compared with the same period of 2014 was due to higher operating income, offset in part by lower net realized investment gains.

 

 

Operating income, which we define as net income excluding realized investment gains and losses after tax, was $1.40 billion in the first nine months of 2015 and $547 million in the third quarter compared with $1.31 billion and $522 million, respectively, in the same periods of 2014. The higher operating income in the first nine months and third quarter of 2015 compared with the same periods of 2014 was due to higher underwriting income in our property and casualty insurance business, offset in part by lower property and casualty investment income. Management uses operating income, a non-GAAP financial measure, among other measures, to evaluate its performance because the realization of investment gains and losses in any period could be discretionary as to timing and can fluctuate significantly, which could distort the analysis of operating trends.

 

 

Underwriting results were profitable in the first nine months and third quarter of 2015 and 2014, but more so in the 2015 periods. The combined loss and expense ratio was 87.5% in the first nine months of 2015 and 83.3% in the third quarter compared with 89.6% and 85.8%, respectively, in the same periods of 2014. The 2.1 percentage point decrease in the combined loss and expense ratio in the first nine months of 2015 compared with the same period of 2014 was due to a lower current accident year loss ratio excluding catastrophes. The 2.5 percentage point decrease in the combined loss and expense ratio in the third quarter of 2015 compared with the same period of 2014 was due primarily to a lower impact of castastrophes and, to a lesser extent, a higher amount of favorable prior year loss development. The impact of catastrophes accounted for 4.6 percentage points of the combined ratio in the first nine months of 2015 and 2014. The impact of catastrophes accounted for 1.0 percentage point of the combined ratio in the third quarter of 2015 compared with 2.4 percentage points in the same period of 2014.


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In the first nine months and third quarter of 2015, we estimate that we experienced overall favorable development of about $475 million and $180 million, respectively, on net loss reserves established as of the previous year end. We estimate that in the first nine months and third quarter of 2014, we experienced overall favorable prior year loss development of about $480 million and $155 million, respectively. In the first nine months and third quarter of both years we experienced favorable prior year loss development in each segment of our insurance business, but more so in our commercial insurance and specialty insurance segments.

 

 

Total net premiums written increased by 1% in the first nine months of 2015 and were flat in the third quarter compared with the same periods of 2014. The growth in net premiums written in the first nine months and third quarter of 2015 was negatively impacted by foreign currency translation, reflecting the impact of the stronger U.S. dollar relative to several currencies in which we wrote business outside the United States in the 2015 periods compared with the same periods of 2014. In the first nine months of 2015, net premiums written outside the United States represented 22% of our total net premiums written. Total net premiums written excluding the effect of foreign currency translation increased by 4% in the first nine months of 2015 and 3% in the third quarter. Net premiums written in the United States increased by 5% in the first nine months of 2015 and 4% in the third quarter. Net premiums written outside the United States decreased by 9% in the first nine months of 2015 and 12% in the third quarter, when measured in U.S. dollars. Excluding the effect of foreign currency translation, such premiums increased by 4% in the first nine months of 2015 and 2% in the third quarter. Management uses growth in net premiums written excluding the effect of foreign currency translation, a non-GAAP financial measure, to evaluate the trends in net premiums written, exclusive of the effect of fluctuations in exchange rates between the U.S. dollar and the foreign currencies in which business is transacted. The impact of foreign currency translation is excluded as exchange rates may fluctuate significantly and the effect of fluctuations could distort the analysis of trends. When excluding the effect of foreign currency translation on growth, management uses the current period average exchange rates to translate both the current period and the prior period foreign currency denominated net premiums written amounts.

 

 

Property and casualty investment income before taxes decreased by 5% in the first nine months and third quarter of 2015 compared with the same periods of 2014. Property and casualty investment income after tax decreased by 5% in the first nine months of 2015 and 6% in the third quarter compared with the same periods of 2014. The decreases in both periods of 2015 were due to a decline in the average yield on our investment portfolio and, to a lesser extent, the effect of foreign currency translation. Management uses property and casualty investment income after tax, a non-GAAP financial measure, to evaluate its investment results because it reflects the impact of any change in the proportion of tax exempt investment income to total investment income and is therefore more meaningful for analysis purposes than investment income before income tax.


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Net realized investment gains before tax were $113 million ($75 million after tax) in the first nine months of 2015 and $82 million ($54 million after tax) in the third quarter compared with $351 million ($228 million after tax) and $110 million ($72 million after tax), respectively, in the same periods of 2014. The net realized investment gains in the first nine months and third quarter of 2015 were primarily related to investments in limited partnerships, which generally are reported on a one quarter lag, and sales of equity securities. The net realized investment gains in the first nine months and third quarter of 2014 were primarily related to investments in limited partnerships, sales of equity securities and, to a lesser extent, sales of fixed maturity securities.

 

 

On June 30, 2015, Chubb entered into an Agreement and Plan of Merger (Merger Agreement) with ACE, a company organized under the laws of Switzerland, and William Investment Holdings Corporation (Merger Sub), a New Jersey corporation and a wholly owned indirect subsidiary of ACE, pursuant to which Merger Sub will merge with and into Chubb, with Chubb surviving as a wholly owned indirect subsidiary of ACE (the Merger). At the effective time of the Merger, each share (except for certain shares held by ACE, Chubb or their subsidiaries) of common stock of Chubb, par value $1.00 per share, will be converted into the right to receive 0.6019 of a common share of ACE, par value CHF 24.15 per share, and $62.93 in cash. The closing of the Merger is subject to various customary conditions, including receipt of required insurance regulatory and other governmental approvals. Some other closing conditions have already been satisfied, including Chubb shareholder approval of the Merger Agreement, approval by ACE shareholders of certain Merger-related matters and the termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The transaction is expected to close during the first quarter of 2016. The Merger Agreement is discussed further in Note (2) of the Notes to Consolidated Financial Statements and in Capital Resources and Liquidity – Liquidity.

A summary of our consolidated net income is as follows:

 

     Periods Ended September 30  
     Nine Months     Third Quarter  
     2015     2014     2015     2014  
     (in millions)  

Property and casualty insurance

   $ 2,103      $ 1,925      $ 831      $ 766   

Corporate and other

     (209     (177     (66     (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income before income tax

     1,894        1,748        765        708   

Federal and foreign income tax

     499        434        218        186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated operating income

     1,395        1,314        547        522   

Realized investment gains after income tax

     75        228        54        72   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

   $ 1,470      $ 1,542      $ 601      $ 594   
  

 

 

   

 

 

   

 

 

   

 

 

 


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Property and Casualty Insurance

A summary of the results of operations of our property and casualty insurance business is as follows:

 

     Periods Ended September 30  
     Nine Months     Third Quarter  
     2015     2014     2015     2014  
     (in millions)  

Underwriting

        

Net premiums written

   $ 9,586      $ 9,454      $ 3,171      $ 3,169   

Increase in unearned premiums

     (182     (242     (5     (50
  

 

 

   

 

 

   

 

 

   

 

 

 

Premiums earned

     9,404        9,212        3,166        3,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Losses and loss expenses

     5,260        5,316        1,633        1,679   

Operating costs and expenses

     2,999        2,987        996        1,004   

Decrease (increase) in deferred policy acquisition costs

     (44     (48     1        (14

Dividends to policyholders

     31        32        11        11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting income

     1,158        925        525        439   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investments

        

Investment income before expenses

     982        1,034        322        338   

Investment expenses

     33        30        12        11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

     949        1,004        310        327   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other charges

     (4     (4     (4       
  

 

 

   

 

 

   

 

 

   

 

 

 

Property and casualty income before tax

   $ 2,103      $ 1,925      $ 831      $ 766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Property and casualty investment income after tax

   $ 782      $ 822      $ 255      $ 270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Property and casualty income before tax was higher in the first nine months and third quarter of 2015 compared with the same periods of 2014, due to higher underwriting income, offset in part by lower investment income. The higher underwriting income in the first nine months of 2015 compared with the same period of 2014 was due to a lower current accident year loss ratio excluding catastrophes. The higher underwriting income in the third quarter of 2015 compared with the same period of 2014 was due primarily to a lower impact of catastrophes and, to a lesser extent, a higher amount of favorable prior year loss development. The lower investment income in the first nine months and third quarter of 2015 compared with the same periods of 2014 was due to a decline in the average yield on our investment portfolio and, to a lesser extent, the effect of foreign currency translation.


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The profitability of our property and casualty insurance business depends on the results of both our underwriting and investment operations. We view these as two distinct operations since the underwriting functions are managed separately from the investment function. Accordingly, in assessing our performance, we evaluate underwriting results separately from investment results.

Underwriting Results

We evaluate the underwriting results of our property and casualty insurance business in the aggregate and for each of our business units.

Net Premiums Written

Net premiums written were $9.6 billion in the first nine months of 2015 compared with $9.5 billion in the same period of 2014. Net premiums written were $3.2 billion in the third quarter of both years. Net premiums written by business unit were as follows:

 

     Nine Months Ended
September 30
     % Incr.     Quarter Ended
September 30
     % Incr.  
     2015     2014      (Decr.)     2015      2014      (Decr.)  
     (in millions)            (in millions)         

Personal insurance

   $ 3,423      $ 3,389         1   $ 1,156       $ 1,167         (1 )% 

Commercial insurance

     4,206        4,084         3        1,334         1,301         3   

Specialty insurance

     1,958        1,980         (1     681         701         (3
  

 

 

   

 

 

      

 

 

    

 

 

    

Total insurance

     9,587        9,453         1        3,171         3,169           

Reinsurance assumed

     (1     1         *                        *   
  

 

 

   

 

 

      

 

 

    

 

 

    

Total

   $ 9,586      $ 9,454         1      $ 3,171       $ 3,169           
  

 

 

   

 

 

      

 

 

    

 

 

    

 

* The change in net premiums written is not presented for this business unit since it is in runoff.

Net premiums written increased by 1% in the first nine months of 2015 compared with the same period of 2014 as a result of growth in premiums written in the United States. Net premiums written were flat in the third quarter of 2015 compared with the same period of 2014 as growth inside the United States was offset by a decline outside the United States. The growth in net premiums written in the first nine months and third quarter of 2015 was negatively impacted by foreign currency translation, reflecting the impact of the stronger U.S. dollar relative to several currencies in which we wrote business outside the United States in the 2015 periods compared with the same periods of 2014. Net premiums written excluding the effect of foreign currency translation increased by 4% in the first nine months of 2015 and 3% in the third quarter. Net premiums written in the United States, which in the first nine months of 2015 represented 78% of our total net premiums written, increased by 5% in the first nine months of 2015 and 4% in the third quarter. Net premiums written outside the United States decreased by 9% in the first nine months of 2015 and 12% in the third quarter, when measured in U.S. dollars. Excluding the effect of foreign currency translation, such premiums increased by 4% in the first nine months of 2015 and 2% in the third quarter.


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We classify business as written inside or outside the United States based on the location of the risks associated with the underlying policies. The method of determining location of risk varies by class of business. Location of risk for property classes is typically based on the physical location of the covered property, while location of risk for liability classes may be based on the main location of the insured, or in the case of the workers’ compensation class, the primary work location of the covered employee.

Net premiums written in the United States grew in each segment of our business in the first nine months of 2015 compared with the same period of 2014, with the most significant growth occurring in our personal insurance and commercial insurance segments. Net premiums written in the United States also grew in our personal insurance and commercial insurance segments in the third quarter of 2015 compared with the same period of 2014, but were flat in our specialty insurance segment. Growth in the United States in our personal insurance segment in both periods of 2015 reflected higher insured exposures, higher rates upon renewal, strong retention of existing business, and new business. Growth in the United States in the first nine months of 2015 in our commercial insurance segment and our professional liability business, which is the predominant component of our specialty insurance segment, reflected high retention of existing business, new business, as well as renewal rate increases. Growth in the United States in the third quarter in our commercial insurance segment also reflected high retention of existing business and new business, but renewal rates were flat. Net premiums written in the United States in the third quarter of 2015 in our professional liability business reflected strong retention and new business, as well as slightly higher renewal rates and insured exposures.

Average renewal rates in the United States in our personal insurance segment were up slightly in the first nine months and third quarter of 2015 compared with expiring rates. The amounts of coverage purchased or the insured exposures, both of which are bases upon which we calculate the premiums we charge, were up modestly in the United States in the first nine months and third quarter of 2015. Retention levels in our personal insurance segment in the United States remained strong in the first nine months and third quarter of 2015. The amount of new business in the United States in our personal insurance segment was higher in the first nine months and third quarter of 2015, but more so in the third quarter, compared with the same periods of 2014.

Average renewal rates in the United States in the first nine months of 2015 were up slightly in our commercial insurance segment and up modestly in our professional liability business compared with expiring rates. In the third quarter, such rates were flat in our commercial insurance segment and up slightly in our professional liability business compared with expiring rates. On average, the amounts of coverage purchased or the insured exposures upon renewal were flat in our commercial insurance segment in the United States in the first nine months and third quarter of 2015. Such amounts were up slightly in our professional liability business in the first nine months and third quarter of 2015. We continued to retain a high percentage of our existing commercial insurance and professional liability business in the United States in the first nine months and third quarter of 2015. Retention levels in the first nine months of 2015 were modestly higher in our commercial insurance segment and


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slightly higher in our professional liability business compared with the same period of 2014. In the third quarter of 2015, such levels were slightly higher in our commercial insurance segment and flat in our professional liability business compared with the same period of 2014. As portions of our business have approached rate adequacy due to pricing and underwriting actions over the past several years, the level of renewal rate increases has moderated and we have sought to maintain high retention levels. The amount of new business in the United States was up in both our commercial insurance segment and professional liability business in the first nine months and third quarter of 2015 compared with the same periods of 2014, but more so in our commercial insurance segment.

The decrease in net premiums written outside the United States in the first nine months and third quarter of 2015 compared with the same periods of 2014 reflected decreases in each segment of our insurance business driven primarily by the negative effect of foreign currency translation. In both periods, the most significant decrease occurred in our personal insurance segment. Net premiums written outside the United States excluding the effect of foreign currency translation increased by 4% in the first nine months of 2015, with the most significant growth occurring in our commercial insurance segment, a modest increase in our specialty insurance segment and a slight increase in our personal insurance segment. In the third quarter of 2015, net premiums written outside the United States excluding the effect of foreign currency translation increased by 2%, with a modest increase occurring in our commercial insurance and specialty insurance segments and a slight decrease in our personal insurance segment.

Average renewal rates outside the United States in our personal insurance segment were higher in the first nine months and third quarter of 2015 compared with expiring rates, driven particularly by the automobile class.

Average renewal rates outside the United States were flat in both our commercial insurance segment and professional liability business in the first nine months of 2015. Such rates were also flat in our commercial insurance segment, but down slightly in our professional liability business in the third quarter compared with expiring rates. On average, the amounts of coverage purchased or the insured exposures upon renewal were up slightly in the first nine months of 2015 and up modestly in the third quarter in our commercial insurance segment outside the United States. Such amounts were flat in our professional liability business outside the United States in the first nine months and third quarter of 2015. We continued to retain a high percentage of our existing commercial and professional liability business outside the United States in the first nine months and third quarter of 2015. Retention levels in the first nine months of 2015 were flat in our commercial insurance segment and up slightly in our professional liability business compared with the same period of 2014. Retention levels in the third quarter of 2015 were down modestly in our commercial insurance segment and down slightly in our professional liability business compared with the same period of 2014. The amount of new business outside the United States in the first nine months and third quarter of 2015 compared with the same periods of 2014 was lower in both our commercial insurance segment and professional liability business.


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We expect that during the remainder of 2015, market conditions will remain competitive. We also expect that our net premiums written in the fourth quarter of 2015 will be negatively impacted by foreign currency translation, assuming average foreign currency to U.S. dollar exchange rates for the major currencies in which we write business remain similar to the September 30, 2015 levels.

Ceded Reinsurance

Our premiums written are net of amounts ceded to reinsurers who assume a portion of the risk under the insurance policies we write that are subject to reinsurance.

The most significant component of our ceded reinsurance program is property reinsurance. We purchase two main types of property reinsurance: catastrophe and property per risk.

For property risks in the United States and Canada we purchase traditional catastrophe reinsurance, including our primary treaty, which we refer to as the North American catastrophe treaty, as well as supplemental catastrophe reinsurance that provides additional coverage for our exposures in the northeast United States. For certain exposures in the United States, we have also arranged for the purchase of reinsurance funded through the issuance of multi–year, collateralized risk-linked securities, known as catastrophe bonds. For events outside the United States, we also purchase traditional catastrophe reinsurance.

We renewed our primary traditional property catastrophe treaties and our commercial property per risk treaty in April 2015 with limit structures similar to the expiring treaties and with modest enhancements in coverage, as well as in terms and conditions. The supplemental catastrophe reinsurance that provides coverage for our exposures in the northeast United States remains in effect until June 2016. In March 2015, we arranged for the purchase of reinsurance through the issuance of a catastrophe bond to replace the portion of a catastrophe bond that expired in March 2015.

The North American catastrophe treaty has an initial retention of $500 million and provides coverage for exposures in the United States and Canada of approximately 34% of losses (net of recoveries from other available reinsurance) between $500 million and $900 million and approximately 75% of losses (net of recoveries from other available reinsurance) between $900 million and $1.75 billion. For certain catastrophic events in the northeast United States or along the southern U.S. coastline, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance and/or the catastrophe bond arrangements provides additional coverage as discussed below.

The catastrophe bond arrangements provide reinsurance coverage for specific types of losses in specific geographic locations. They are generally designed to supplement coverage provided under the North American catastrophe treaty. We currently have three catastrophe bond arrangements in effect that expire between 2016 and 2020. We have a $150 million arrangement that expires in March 2016 that provides reinsurance coverage for our exposure to homeowners-related hurricane and severe thunderstorm losses in eight states along the southern U.S. coastline. We have a $270 million arrangement that expires in March 2018. We also have a $250 million arrangement that incepted in March 2015 and expires in March 2020, which replaced a $250 million arrangement that


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expired in March 2015. Both of the latter two catastrophe bond arrangements provide reinsurance coverage for our exposure to homeowners and commercial losses related to certain perils, including hurricanes and other named storms, earthquakes, severe thunderstorms and winter storms in 12 states in the northeast United States and the District of Columbia.

For the indicated catastrophic events in the northeast United States, the combination of the North American catastrophe treaty, the supplemental catastrophe reinsurance, and the $270 million and $250 million catastrophe bond arrangements provides additional coverage of approximately 63% of losses (net of recoveries from other available reinsurance) between $1.75 billion and $3.67 billion.

For hurricane and severe thunderstorm events along the southern U.S. coastline, the $150 million catastrophe bond arrangement provides additional coverage of approximately 45% of homeowners-related hurricane and severe thunderstorm losses (net of recoveries from other available reinsurance) between $875 million and $1.21 billion.

For hurricane events in Florida, in addition to the coverage provided by the North American catastrophe treaty and the $150 million catastrophe bond arrangement discussed above, we have reinsurance from the Florida Hurricane Catastrophe Fund, which is a state-mandated fund designed to reimburse insurers for a portion of their residential catastrophe-related hurricane losses. Our participation in this program, for which the most recent annual period began on June 1, 2015, provides coverage of 90% of homeowners-related hurricane losses in Florida in excess of our initial retention of $140 million per event. Under the terms of the program, our aggregate recoveries during the annual coverage period are limited to approximately $340 million, based on our current level of participation.

Our primary property catastrophe treaty for events outside the continental United States, including Canada, provides coverage of approximately 75% of losses (net of recoveries from other available reinsurance) between $100 million and $350 million. For catastrophic events in Australia and Canada, additional reinsurance provides coverage of 80% of losses (net of recoveries from other available reinsurance) between $350 million and $475 million.

Our commercial property per risk treaty provides coverage for property exposures both inside and outside the United States. Depending upon the currency in which the covered insurance policy was issued and prevailing foreign currency exchange rates, the treaty provides coverage per risk of approximately $435 million to $690 million in excess of our initial retention, which is generally between $20 million and $25 million.

In addition to our major property catastrophe and property per risk treaties, we purchase several smaller property treaties that provide coverage for specific classes of business or locations having concentrations of risk.

Recoveries under our property reinsurance treaties are subject to certain coinsurance requirements that affect the interaction of some elements of our reinsurance program.


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Our property reinsurance treaties generally contain terrorism exclusions for acts perpetrated by foreign terrorists, and for nuclear, biological, chemical and radiological loss causes, whether such acts are perpetrated by foreign or domestic terrorists.

The renewal rates associated with the North American catastrophe treaty, the catastrophe treaty that covers events outside the United States and the commercial property per risk treaty were lower than the rates for the expiring treaties. The costs related to the reinsurance purchased through the issuance of the catastrophe bond in March 2015 were also lower than those related to the expiring bond. We therefore expect that the overall cost of our property reinsurance program will be lower in 2015 than in 2014.

Profitability

The combined loss and expense ratio (or combined ratio), expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property and casualty insurance business. Management evaluates the performance of our underwriting operations and of each of our business units using, among other measures, the combined loss and expense ratio calculated in accordance with U.S. statutory accounting principles. It is the sum of the ratio of losses and loss expenses to premiums earned (loss ratio) and the ratio of statutory underwriting expenses to premiums written (expense ratio) after reducing both premium amounts by dividends to policyholders. When the combined ratio is under 100%, underwriting results are generally considered profitable; when the combined ratio is over 100%, underwriting results are generally considered unprofitable.

Statutory accounting principles applicable to U.S. property and casualty insurance companies differ in certain respects from generally accepted accounting principles in the United States (GAAP). Under statutory accounting principles, policy acquisition and other underwriting expenses are recognized immediately, not at the time premiums are earned. Management uses underwriting results determined in accordance with GAAP, among other measures, to assess the overall performance of our underwriting operations. To convert statutory underwriting results to a GAAP basis, certain policy acquisition expenses are deferred and amortized over the period in which the related premiums are earned. Underwriting income determined in accordance with GAAP is defined as premiums earned less losses and loss expenses incurred and GAAP underwriting expenses incurred.

An accident year is the calendar year in which a loss is incurred or, in the case of claims-made policies, the calendar year in which a loss is reported. The total losses and loss expenses incurred for a particular calendar year include current accident year losses and loss expenses as well as any increases or decreases to our estimates of losses and loss expenses that occurred in all prior accident years, which we refer to as prior year loss development.


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Underwriting results for our property and casualty insurance business were profitable in the first nine months and third quarter of 2015 and 2014, but more so in the 2015 periods. The combined loss and expense ratio was as follows:

 

     Periods Ended September 30  
     Nine Months     Third Quarter  
     2015     2014     2015     2014  

Loss ratio

     56.1     57.9     51.8     54.0

Expense ratio

     31.4        31.7        31.5        31.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined loss and expense ratio

     87.5     89.6     83.3     85.8
  

 

 

   

 

 

   

 

 

   

 

 

 

The 1.8 percentage point decrease in the loss ratio in the first nine months of 2015 compared with the same period of 2014 was driven by a lower current accident year loss ratio excluding catastrophes. The 2.2 percentage point decrease in the loss ratio in the third quarter of 2015 compared with the same period of 2014 was due primarily to a lower impact of catastrophes and, to a lesser extent, a higher amount of favorable prior year loss development. The current accident year loss ratio excluding catastrophes was lower in the first nine months of 2015 in each segment of our insurance business compared with the same period of 2014. The current accident year loss ratio excluding catastrophes was lower in the third quarter of 2015 in our specialty insurance segment, similar in our personal insurance segment and slightly higher in our commercial insurance segment compared with the same period of 2014. The loss ratio in the first nine months reflected the significant impact of catastrophes experienced in the first six months of both years. The impact of catastrophes was more modest in the third quarter of both years. The loss ratio in the first nine months and third quarter of 2015 and 2014 also reflected favorable loss experience excluding catastrophes that we believe resulted from our disciplined underwriting in recent years. The loss ratio in the first nine months and third quarter of both years also benefited from the positive impact of rate increases on premiums earned in most classes of business as well as favorable prior year loss development.

Our underwriting profitability in any given period will be affected by the impact of catastrophes in that period. We define a catastrophe as an event that is estimated to cause $25 million or more in industry-wide insured property losses and affects a significant number of policyholders and insurers.

The net impact of catastrophes in the first nine months of 2015 was $430 million, which represented 4.6 percentage points of the combined ratio, compared with $419 million or 4.6 percentage points in the same period of 2014. The net impact of catastrophes in the third quarter of 2015 was $32 million, which represented 1.0 percentage point of the combined ratio, compared with $74 million or 2.4 percentage points in the same period of 2014. Most of the catastrophe losses in the first nine months of 2015 and 2014 related to weather-related events in the United States.


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The impact of catastrophes, including losses and any related reinsurance reinstatement premiums, for individually significant events and all other events was as follows:

 

Nine Months Ended September 30

   Impact of
Catastrophes
 
     (in millions)  

2015

  

Winter freeze – Mid-Atlantic and Northeast United States – February 2015

   $ 154   

Other events

     276   
  

 

 

 

Total

   $ 430   
  

 

 

 

2014

  

Winter freeze – 17 states in the United States – January 2014

   $ 121   

Other events

     298   
  

 

 

 

Total

   $ 419   
  

 

 

 

The net impact of catastrophes in the first nine months of 2015 reflected $12 million of favorable prior year loss development. The net impact of catastrophes in the first nine months of 2014 reflected no prior year loss development. The net impact of catastrophes in the third quarter of 2015 reflected $3 million of unfavorable prior year loss development compared with $8 million in the same period of 2014.

The expense ratio decreased by 0.3 of a percentage point in the first nine months and third quarter of 2015 compared with the same periods of 2014. The decrease in the expense ratio in the first nine months of 2015 was due primarily to growth in net premiums written while overhead expenses were flat compared with the same period of 2014. The decrease in the third quarter of 2015 was due primarily to lower commissions outside the United States and, to a lesser extent, lower overhead expenses compared with the same period of 2014.

Review of Underwriting Results by Business Unit

Personal Insurance

Net premiums written in our personal insurance segment, which represented 36% of our total net premiums written in the first nine months of 2015, increased by 1% in the first nine months of 2015 and decreased by 1% in the third quarter compared with the same periods of 2014. Net premiums written for the classes of business within the personal insurance segment were as follows:

 

     Nine Months Ended
September 30
     % Incr.     Quarter Ended
September 30
     % Incr.  
     2015      2014      (Decr.)     2015      2014      (Decr.)  
     (in millions)            (in millions)         

Automobile

   $ 539       $ 558         (3 )%    $ 174       $ 190         (8 )% 

Homeowners

     2,139         2,093         2        745         735         1   

Other

     745         738         1        237         242         (2
  

 

 

    

 

 

      

 

 

    

 

 

    

Total personal

   $ 3,423       $ 3,389         1      $ 1,156       $ 1,167         (1
  

 

 

    

 

 

      

 

 

    

 

 

    


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The increase in net premiums written in our personal insurance segment in the first nine months of 2015 compared with the same period of 2014 was driven by growth in the United States, offset in part by a decrease in net premiums written outside the United States. The decrease in net premiums written in our personal insurance segment in the third quarter of 2015 compared with the same period of 2014 was driven by a decrease in net premiums written outside the United States, offset in part by growth inside the United States. Premium growth occurred in all classes of our personal insurance segment in the first nine months and third quarter of 2015 in the United States. Net premiums written outside the United States decreased in all classes of this segment in the first nine months and third quarter of 2015. In both periods, net premiums written reflected the negative effect of foreign currency translation. Excluding the effect of foreign currency translation, net premiums written outside the United States increased slightly in the first nine months of 2015 and decreased slightly in the third quarter compared with the same periods of 2014. The overall growth in our personal insurance segment excluding the effect of foreign currency translation was 4% in the first nine months of 2015 and 3% in the third quarter. Such growth reflected higher insured exposures, higher rates upon renewal, strong retention of existing business, and new business.

Net premiums written for our personal automobile business decreased in the first nine months and third quarter of 2015 compared with the same periods of 2014, driven by a decrease in net premiums written outside the United States, which reflected the negative effect of foreign currency translation and underwriting actions in Brazil. Personal automobile net premiums written outside the United States represented approximately 35% of our total personal automobile net premiums written in the first nine months of 2015, with approximately half of such premiums written in Brazil. Personal automobile net premiums written outside the United States represented approximately 30% of our total personal automobile net premiums written in the third quarter of 2015, with approximately 40% of such premiums written in Brazil. Personal automobile net premiums written in the United States increased modestly in the first nine months and third quarter of 2015 compared with the same periods of 2014.

Net premiums written for our homeowners business increased in the first nine months and third quarter of 2015 compared with the same periods of 2014, due to growth in the United States, reflecting increases in the values insured on existing policies, higher renewal rates, strong retention of existing business, and new business. Net premiums written outside the United States for our homeowners business decreased in the first nine months and third quarter of 2015 compared with the same periods of 2014, due to the negative effect of foreign currency translation.

Net premiums written for our other personal business, which includes accident and health, excess liability and yacht coverages, increased in the first nine months of 2015 compared with the same period of 2014, as growth inside the United States was mostly offset by a decrease in net premiums written outside the United States. The decrease in net premiums written outside the United States for our other personal business in the first nine months of 2015 compared with the same period of 2014 was due to the negative effect of foreign currency translation. Net premiums written for our other personal business decreased in the third quarter of 2015 compared with the same period of 2014,


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driven by a significant decrease in net premiums written outside the United States due to the negative effect of foreign currency translation. Net premiums written in the United States increased in the third quarter of 2015. Premiums for our accident and health business, about half of which was written outside the United States in the first nine months of 2015, decreased slightly in the first nine months of 2015 and decreased modestly in the third quarter compared with the same periods of 2014. The decreases in accident and health premiums written in the 2015 periods were caused by decreases in premiums written outside the United States due to the negative effect of foreign currency translation. Premiums for our accident and health business written in the United States increased significantly in the first nine months of 2015, but increased only slightly in the third quarter compared with the same periods of 2014. Premiums for our excess liability business, most of which is written in the United States, increased in the first nine months and third quarter of 2015 compared with the same periods of 2014.

Our personal insurance segment produced similarly profitable underwriting results in the first nine months of 2015 and 2014. Results for our personal insurance segment were also profitable in the third quarter of both years, but more so in 2015. The combined loss and expense ratios for the classes of business within the personal insurance segment were as follows:

 

     Periods Ended September 30  
     Nine Months     Third Quarter  
     2015     2014     2015     2014  

Automobile

     98.1     97.4     98.5     95.2

Homeowners

     91.7        92.2        77.2        80.3   

Other

     93.5        93.7        97.6        95.4   

Total personal

     93.1        93.3        84.9        85.9   

The combined loss and expense ratio for our personal insurance segment was similar in the first nine months of 2015 and 2014, reflecting slightly improved results in our homeowners and other personal businesses, mostly offset by slightly worse results in our automobile business. The 1.0 percentage point decrease in the combined loss and expense ratio for our personal insurance segment in the third quarter of 2015 compared with the same period of 2014 was driven by improved results for our homeowners business, partially offset by worse results in our personal automobile and other personal businesses. The impact of catastrophes accounted for 9.4 percentage points of the combined ratio for our personal insurance segment in the first nine months of 2015 and 2.0 percentage points in the third quarter compared with 7.3 and 3.5 percentage points, respectively, in the same periods of 2014.

Personal automobile results were less profitable in the first nine months of 2015 compared with the same period of 2014, as modestly worse results outside the United States in 2015 were partially offset by slightly better results inside the United States. Our personal automobile business produced profitable results in the United States in the first nine months of both years, but slightly more so in 2015. Personal automobile results outside the United States were unprofitable in the first nine months of 2015 compared with near breakeven results in the same period of 2014. Personal automobile results were profitable


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in the third quarter of 2015 and 2014, but more so in 2014. The 3.3 percentage point increase in the combined ratio in the third quarter of 2015 compared with the same period of 2014 reflected a deterioration in our personal automobile results outside the United States. Results in the United States were similarly profitable in the third quarter of 2015 and 2014. Results outside the United States were unprofitable in the third quarter of 2015 compared with modestly profitable results in the same period of 2014.

Homeowners results were profitable in the first nine months of 2015 and 2014. The 0.5 of a percentage point decrease in the combined ratio in the first nine months of 2015 compared with the same period of 2014 was mainly due to a lower current accident year loss ratio excluding catastrophes, substantially offset by a higher impact of catastrophes. Homeowners results were profitable in the third quarter of both years, but more so in 2015. The 3.1 percentage point decrease in the combined ratio in the third quarter of 2015 compared with the same period of 2014 was due primarily to a lower impact of catastrophes. The impact of catastrophes accounted for 14.9 percentage points of the combined ratio for this class in the first nine months of 2015 and 3.0 percentage points in the third quarter compared with 11.8 and 5.6 percentage points, respectively, in the same periods of 2014.

Other personal results were similarly profitable in the first nine months of 2015 and 2014 as improved results in the excess liability and accident and health components of this business were substantially offset by worse results in the yacht component. Other personal results were profitable in the third quarter of both years, but more so in 2014, due primarily to better results in the yacht component of this business. Results for the excess liability component of our other personal business were highly profitable in the first nine months of both years, but more so in 2015. Results for this component were also highly profitable in the third quarter of both years, but more so in 2014. Excess liability results benefited from favorable prior year loss development in the first nine months and third quarter of both years. The accident and health component of our other personal business produced near breakeven results in the first nine months of 2015 compared with slightly unprofitable results in the same period of 2014. Results for this component were modestly unprofitable in the third quarter of both years, but more so in 2014. In the first nine months and third quarter of both years, results for our accident and health business were profitable in the United States and unprofitable outside the United States. Our yacht business produced unprofitable results in the first nine months and third quarter of 2015 compared with highly profitable results in the same periods of 2014.


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Commercial Insurance

Net premiums written in our commercial insurance segment, which represented 44% of our total net premiums written in the first nine months of 2015, increased by 3% in the first nine months and third quarter of 2015 compared with the same periods of 2014. Net premiums written for the classes of business within the commercial insurance segment were as follows:

 

     Nine Months Ended
September 30
     % Incr.
(Decr.)
    Quarter Ended
September 30
     %  Incr.
(Decr.)
 
     2015      2014        2015      2014     
     (in millions)            (in millions)         

Multiple peril

   $ 843       $ 837         1   $ 289       $ 291         (1 )% 

Casualty

     1,243         1,251         (1     396         401         (1

Workers’ compensation

     989         874         13        326         279         17   

Property and marine

     1,131         1,122         1        323         330         (2
  

 

 

    

 

 

      

 

 

    

 

 

    

Total commercial

   $ 4,206       $ 4,084         3      $ 1,334       $ 1,301         3   
  

 

 

    

 

 

      

 

 

    

 

 

    

Growth in net premiums written in our commercial insurance segment in the first nine months and third quarter of 2015 compared with the same periods of 2014 was driven by growth in the United States. Net premiums written outside the United States decreased in the first nine months and third quarter of 2015, more so in the third quarter, due to the negative effect of foreign currency translation. Excluding the effect of foreign currency translation, net premiums written outside the United States increased in both periods of 2015. Overall premium growth in our commercial insurance segment excluding the effect of foreign currency translation was 6% in the first nine months of 2015 and 5% in the third quarter. Such growth in both periods primarily reflected high retention and new business. The most significant growth in our commercial insurance segment in the first nine months and third quarter of 2015 occurred in the workers’ compensation class, which is primarily written in the United States, reflecting high retention, increased renewal exposure and new business. In the first nine months and third quarter of 2015, net premiums written for the other classes within our commercial insurance segment increased or decreased only slightly, reflecting the negative effect of foreign currency translation on net premiums written outside the United States. Average renewal rates in our commercial insurance segment in the United States were up slightly in the first nine months of 2015 but flat in the third quarter compared with expiring rates. Average renewal rates outside the United States were flat in the first nine months and third quarter of 2015 compared to expiring rates. Retention levels of our existing policyholders were strong in the first nine months and third quarter of both years. Retention levels in the United States were modestly higher in the first nine months of 2015 and slightly higher in the third quarter compared with the same periods of 2014. Retention levels outside the United States were flat in the first nine months of 2015 and down modestly in the third quarter compared with the same periods of 2014. The average renewal exposure change was flat in the United States in the first nine months and third quarter of 2015. The average renewal exposure change was up slightly outside the United States in the first nine months of 2015 and up modestly in the third quarter. The amount of new business was higher in the United States in the first nine months and third quarter of 2015 compared with the same periods of 2014. The amount of new business was lower outside the United States in the first nine months and third quarter of 2015 compared with the same periods of 2014.


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Our commercial insurance segment produced profitable underwriting results in the first nine months and third quarter of 2015 and 2014, but more so in the 2015 periods. The combined loss and expense ratios for the classes of business within the commercial insurance segment were as follows:

 

     Periods Ended September 30  
     Nine Months     Third Quarter  
     2015     2014     2015     2014  

Multiple peril

     88.9     88.4     78.2     81.9

Casualty

     85.9        90.0        84.5        95.3   

Workers’ compensation

     87.3        84.1        87.0        83.9   

Property and marine

     90.7        97.3        94.5        93.3   

Total commercial

     88.0        90.4        86.3        89.5   

The 2.4 percentage point decrease in the combined loss and expense ratio for our commercial insurance segment in the first nine months of 2015 compared with the same period of 2014 was due to a lower impact of catastrophes and a lower current accident year loss ratio excluding catastrophes, offset in part by a lower amount of favorable prior year loss development. The 3.2 percentage point decrease in the combined loss and expense ratio for our commercial insurance segment in the third quarter of 2015 compared with the same period of 2014 was due primarily to a lower impact of catastrophes and a higher amount of favorable prior year loss development. The impact of catastrophes accounted for 2.8 percentage points of the combined ratio for our commercial insurance segment in the first nine months of 2015 and 0.7 of a percentage point in the third quarter compared with 4.5 and 2.6 percentage points, respectively, in the same periods of 2014. Results for our commercial insurance segment in the first nine months and third quarter of 2015 and 2014 benefited from favorable prior year loss development and our disciplined risk selection in recent years.

Multiple peril results were profitable in the first nine months of 2015 and 2014. Multiple peril results were also profitable in the third quarter of both years, but more so in 2015. The 0.5 of a percentage point increase in the combined ratio in the first nine months of 2015 compared with the same period of 2014 was due to less profitable results for the property component of this business, offset in part by more profitable results in the liability component. The 3.7 percentage point decrease in the combined ratio in the third quarter of 2015 compared with the same period of 2014 was due to better results in the property component of this business. Results for the property component of this business were profitable in the first nine months of 2015 compared with highly profitable results in the same period of 2014. Results for this component were highly profitable in the third quarter of both years. Results for the liability component of this business were highly profitable in the first nine months and third quarter of both years. The impact of catastrophes accounted for 5.7 percentage points of the combined ratio for the multiple peril class in the first nine months of 2015 and 1.1 percentage points in the third quarter compared with 5.9 and 3.2 percentage points, respectively, in the same periods of 2014.


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Casualty results were profitable in the first nine months and third quarter of 2015 and 2014, but more so in the 2015 periods. The 4.1 percentage point decrease in the combined ratio in the first nine months of 2015 compared with the same period of 2014 was due to more profitable results in the primary liability and excess liability components of this business. The 10.8 percentage point decrease in the combined ratio in the third quarter of 2015 compared with the same period of 2014 was driven by more profitable results in the excess liability component and, to a lesser extent, the primary liability component of this business. Results for the primary liability component were profitable in the first nine months of 2015 compared with the slightly profitable results in the same period of 2014. Results for this component were also profitable in the third quarter of 2015 compared with near breakeven results in the same period of 2014. Results for the excess liability component were highly profitable in the first nine months and third quarter of 2015 and 2014, but more so in the 2015 periods. Excess liability results in all periods benefited from substantial favorable prior year loss development driven mainly by lower than expected claim severity. Results for the automobile component were breakeven in the first nine months of 2015 and 2014. Results for this component were also breakeven in the third quarter of 2015 compared with modestly profitable results in the same period of 2014. Casualty results were adversely affected by incurred losses related to asbestos and toxic waste claims in the first nine months and third quarter of 2015 and 2014. Our analysis of these exposures resulted in an increase in the estimate of our ultimate liabilities. Such losses represented 4.1 percentage points of the combined ratio for our casualty business in the first nine months of 2015 and 7.4 percentage points in the third quarter compared with 2.9 and 5.9 percentage points, respectively, in the same periods of 2014.

Workers’ compensation results were profitable in the first nine months and third quarter of 2015 and 2014, but more so in the 2014 periods. The 3.2 percentage point increase in the combined ratio in the first nine months of 2015 compared with the same period of 2014 was due to a lower amount of favorable prior year loss development and a slightly higher current accident year loss ratio. The 3.1 percentage point increase in the combined ratio in the third quarter of 2015 compared with the same period of 2014 was also due to a lower amount of favorable prior year loss development and a slightly higher current accident year loss ratio. Results in all periods reflected our disciplined risk selection during the past several years.

Property and marine results were profitable in the first nine months of 2015 and 2014, but more so in 2015. Results were profitable in the third quarter of both years, but slightly more so in 2014. The 6.6 percentage point decrease in the combined ratio in the first nine months of 2015 compared with the same period of 2014 was due to a lower impact of catastrophes and, to a lesser extent, a lower current accident year loss ratio excluding catastrophes. The 1.2 percentage point increase in the combined ratio in the third quarter of 2015 compared to the same period of 2014 was due to a modest amount of unfavorable prior year loss development and a modestly higher current accident year loss ratio excluding catastrophes, offset in part by a lower impact of catastrophes. The impact of catastrophes accounted for 5.7 percentage points of the combined ratio in the first nine months of 2015 and 1.3 percentage points in the third quarter compared with 11.4 and 6.6 percentage points, respectively, in the same periods of 2014.


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Specialty Insurance

Net premiums written in our specialty insurance segment, which represented 20% of our total net premiums written in the first nine months of 2015, decreased by 1% in the first nine months of 2015 and 3% in the third quarter compared with the same periods of 2014. Net premiums written for the classes of business within the specialty insurance segment were as follows:

 

     Nine Months Ended
September 30
     % Incr.
(Decr.)
    Quarter Ended
September 30
     % Incr.
(Decr.)
 
     2015      2014        2015      2014     
     (in millions)            (in millions)         

Professional liability

   $ 1,724       $ 1,753         (2 )%    $ 606       $ 629         (4 )% 

Surety

     234         227         3        75         72         4   
  

 

 

    

 

 

      

 

 

    

 

 

    

Total specialty

   $ 1,958       $ 1,980         (1   $ 681       $ 701         (3
  

 

 

    

 

 

      

 

 

    

 

 

    

The decrease in net premiums written in our specialty insurance segment in the first nine months and third quarter of 2015 compared with the same periods of 2014 reflected the negative effect of foreign currency translation. Excluding the effect of foreign currency translation, net premiums written increased by 2% in the first nine months of 2015 and were flat in the third quarter.

The decrease in net premiums written for our professional liability business in the first nine months and third quarter of 2015 was driven in large part by a decline in net premiums written outside the United States in both periods compared with the same periods of 2014, due to the negative effect of foreign currency translation. Net premiums written in the United States were modestly higher in the first nine months of 2015 and slightly lower in the third quarter compared with the same periods of 2014. Overall premium growth in our professional liability business continued to reflect our focus on profitability in the pricing of renewal policies and new business, in what remains a competitive marketplace. Retention levels for this business remained strong. Such levels were slightly higher in the first nine months of 2015 compared with those in the same period of 2014, both inside and outside the United States. Retention levels were flat inside the United States and down slightly outside the United States in the third quarter of 2015 compared with those in the same period of 2014. New business increased in the United States, but decreased outside the United States, in the first nine months and third quarter of 2015 compared with the same periods of 2014. Average renewal rates in the United States for our professional liability business were up modestly in the first nine months of 2015 and up slightly in the third quarter compared with expiring rates, with increases occurring in most classes of this business. Average renewal rates outside the United States were flat in the first nine months of 2015 and down slightly in the third quarter compared with expiring rates. On average, the amounts of insured exposures upon renewal were up slightly in the United States and flat outside the United States in the first nine months and third quarter of 2015.


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The increase in net premiums written for our surety business in the first nine months of 2015 compared with the same period of 2014 was driven primarily by an increase in premiums written in the United States. Net premiums written outside the United States for our surety business also increased in the first nine months of 2015, but only slightly. In the third quarter of 2015, the increase in net premiums written for our surety business was driven by growth in the United States, offset in part by a decrease in premiums written outside the United States. Growth in net premiums written outside the United States in both periods of 2015 reflected the negative effect of foreign currency translation. Premiums written in our surety business depend significantly on the extent to which our existing customers are awarded contracts to perform services. As a result, premium growth in our surety business can often vary from period to period.

Our specialty insurance segment produced profitable underwriting results in the first nine months and third quarter of 2015 and 2014, but more so in the 2015 periods. The combined loss and expense ratios for the classes of business within the specialty insurance segment were as follows:

 

     Periods Ended September 30  
     Nine Months     Third Quarter  
     2015     2014     2015     2014  

Professional liability

     81.3     82.9     78.1     81.3

Surety

     46.8        73.3        52.1        54.8   

Total specialty

     77.2        81.8        74.8        78.3   

The 4.6 percentage point decrease in the combined loss and expense ratio for our specialty insurance segment in the first nine months of 2015 compared with the same period of 2014 was driven by improved results for our surety business and, to a lesser extent, improved results for our professional liability business. The 3.5 percentage point decrease in the combined loss and expense ratio for our specialty insurance segment in the third quarter of 2015 was driven by improved results in both our professional liability and surety businesses.

Professional liability results were profitable in the first nine months and third quarter of 2015 and 2014, but more so in the 2015 periods. The 1.6 percentage point decrease in the combined ratio for this business in the first nine months of 2015 compared with the same period of 2014 was due to improved current accident year results. The 3.2 percentage point decrease in the combined ratio for this business in the third quarter of 2015 compared with the same period of 2014 was due to improved current accident year results and, to a lesser extent, a higher amount of favorable prior year loss development.

Results for the directors and officers liability class were highly profitable in the first nine months of 2015 and 2014, but more so in 2014. Results for this class were also highly profitable in the third quarter of both years. Results for the directors and officers liability class reflected favorable prior year loss development in the first nine months of 2015 and 2014, but more so in 2014. Results for this class reflected a similar amount of favorable prior year loss development in the third quarter of both years.


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Results for the fiduciary liability class were also highly profitable in the first nine months and third quarter of 2015 and 2014, with results in all periods reflecting favorable prior year loss development. Results for the fidelity class were highly profitable in the first nine months and third quarter of 2015 compared with profitable results in the same periods of 2014. Results for this class reflected favorable prior year loss development in the first nine months of 2015 compared with unfavorable prior year loss development in the same period of 2014. Results for the employment practices liability class were slightly unprofitable in the first nine months of 2015 and modestly profitable in the third quarter compared with modestly unprofitable results in the same periods of 2014. Results for the errors and omissions liability class were profitable in the first nine months of 2015 compared with modestly unprofitable results in the same period of 2014. Results for this class reflected favorable prior year loss development in the first nine months of 2015 compared with unfavorable prior year loss development in the same period of 2014. Results for this class were similarly profitable in the third quarter of both years, reflecting favorable prior year loss development.

Surety results were profitable in the first nine months of 2015 and 2014, but more so in 2015. Such results were also profitable in the third quarter of both years. The combined ratio was 26.5 and 2.7 percentage points lower in the first nine months and third quarter of 2015, respectively, compared with the same periods of 2014. The significantly higher combined ratio in the first nine months of 2014 was due to one large loss in the first quarter outside the United States. Our surety business tends to be characterized by losses that are infrequent but have the potential to be highly severe.

Reinsurance Assumed

Net premiums written in our runoff reinsurance assumed business were not significant in the first nine months and third quarter of 2015 or 2014. Results for this business were profitable in the first nine months and third quarter of 2015 compared with breakeven results in the same periods of 2014. Results in the 2015 periods benefited from favorable prior year loss development.

Catastrophe Risk Management

Our property and casualty insurance subsidiaries have exposure to losses caused by natural perils such as hurricanes and other windstorms, earthquakes, severe winter weather and brush fires as well as from man-made catastrophic events such as terrorism. The frequency and severity of catastrophes are inherently unpredictable.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. We regularly assess our concentrations of risk in catastrophe exposed areas globally and have strategies and underwriting standards to manage these exposures through individual risk selection, subject to regulatory constraints, and through the purchase of catastrophe reinsurance coverage. We use catastrophe modeling and a risk concentration management tool to monitor and control our accumulations of potential losses in catastrophe exposed areas in the United States, such as California and the gulf and east coasts, as well as


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in catastrophe exposed areas in other countries. The information provided by the catastrophe modeling and the risk concentration management tool has resulted in our non-renewing or reducing our exposure on some accounts and refraining from writing others.

Catastrophe modeling generally relies on multiple inputs based on experience, science, engineering and history, and the selection of those inputs requires a significant amount of judgment. Also, the modeling results may fail to account for risks that are outside the range of normal probability or are otherwise unforeseen. Because of this, actual results may differ materially from those derived from our modeling exercises.

We also continue to assess how changes in catastrophe risk, including the potential impact of global climate change, may affect our ability to manage our exposure under the insurance policies we issue, as well as how laws and regulations intended to combat climate change may affect us.

Despite our efforts to manage our catastrophe exposure, the occurrence of one or more severe catastrophic events could have a material effect on the Corporation’s results of operations, financial condition or liquidity.

Loss Reserves

Unpaid losses and loss expenses, also referred to as loss reserves, are the largest liability of our property and casualty insurance subsidiaries.

Our loss reserves include case estimates for claims that have been reported and estimates for claims that have been incurred but not reported at the balance sheet date as well as estimates of the expenses associated with processing and settling all reported and unreported claims, less estimates of anticipated salvage and subrogation recoveries. Estimates are based upon past loss experience modified for current trends as well as prevailing economic, legal and social conditions. Our loss reserves are not discounted to present value.

We regularly review our loss reserves using a variety of actuarial techniques. We update the reserve estimates as historical loss experience develops, additional claims are reported and/or settled and new information becomes available. Any changes in estimates are reflected in operating results in the period in which the estimates are changed.

Incurred but not reported (IBNR) reserve estimates are generally calculated by first projecting the ultimate cost of all claims that have occurred and then subtracting reported losses and loss expenses. Reported losses include cumulative paid losses and loss expenses plus case reserves. The IBNR reserve includes a provision for claims that have occurred but have not yet been reported to us, some of which are not yet known to the insured, as well as a provision for future development on reported claims. A relatively large proportion of our net loss reserves, particularly for long tail liability classes, are reserves for IBNR losses. In fact, about 75% of our aggregate net loss reserves at September 30, 2015 were for IBNR losses.


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Our gross case and IBNR loss reserves and related reinsurance recoverable by class of business were as follows:

 

     Gross Loss Reserves      Reinsurance     

Net

Loss

 

September 30, 2015

   Case      IBNR      Total      Recoverable      Reserves  
     (in millions)  

Personal insurance

              

Automobile

   $ 258       $ 147       $ 405       $ 12       $ 393   

Homeowners

     487         359         846         26         820   

Other

     306         742         1,048         66         982   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total personal

     1,051         1,248         2,299         104         2,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial insurance

              

Multiple peril

     574         1,175         1,749         31         1,718   

Casualty

     1,332         5,516         6,848         419         6,429   

Workers’ compensation

     1,218         2,158         3,376         289         3,087   

Property and marine

     759         443         1,202         311         891   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     3,883         9,292         13,175         1,050         12,125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specialty insurance

              

Professional liability

     1,131         5,323         6,454         241         6,213   

Surety

     16         67         83         5         78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total specialty

     1,147         5,390         6,537         246         6,291   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total insurance

     6,081         15,930         22,011         1,400         20,611   

Reinsurance assumed

     115         233         348         105         243   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,196       $ 16,163       $ 22,359       $ 1,505       $ 20,854   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Gross Loss Reserves      Reinsurance     

Net

Loss

 

December 31, 2014

   Case      IBNR      Total      Recoverable      Reserves  
     (in millions)  

Personal insurance

              

Automobile

   $ 260       $ 151       $ 411       $ 14       $ 397   

Homeowners

     438         353         791         43         748   

Other

     331         739         1,070         70         1,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total personal

     1,029         1,243         2,272         127         2,145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commercial insurance

              

Multiple peril

     596         1,194         1,790         40         1,750   

Casualty

     1,412         5,514         6,926         412         6,514   

Workers’ compensation

     1,116         2,091         3,207         289         2,918   

Property and marine

     773         465         1,238         355         883   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     3,897         9,264         13,161         1,096         12,065   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Specialty insurance

              

Professional liability

     1,180         5,587         6,767         287         6,480   

Surety

     18         62         80         5         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total specialty

     1,198         5,649         6,847         292         6,555   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total insurance

     6,124         16,156         22,280         1,515         20,765   

Reinsurance assumed

     145         253         398         124         274   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,269       $ 16,409       $ 22,678       $ 1,639       $ 21,039   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


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Loss reserves, net of reinsurance recoverable, decreased by $185 million during the first nine months of 2015. The decrease in loss reserves during the first nine months of 2015 included a decrease of $361 million related to the effect of foreign currency translation, due to a stronger U.S. dollar relative to the currencies in which our loss reserves were held at September 30, 2015 compared with December 31, 2014. The decrease in loss reserves also reflected an increase of $34 million related to catastrophe losses. Loss reserves related to our insurance business decreased by $154 million and loss reserves related to our runoff reinsurance assumed business decreased by $31 million.

The increase in gross loss reserves in the homeowners class during the first nine months of 2015 was driven primarily by catastrophe losses. The decrease in gross loss reserves in the casualty classes was mainly driven by the effect of foreign currency translation. The increase in gross loss reserves in the workers’ compensation class was driven mainly by increased exposures. The decrease in gross loss reserves in the professional liability classes reflected the effect of foreign currency translation, as well as payment activity and favorable prior year loss development.

In establishing the loss reserves of our property and casualty insurance subsidiaries, we consider facts currently known and the present state of the law and coverage litigation. Based on all information currently available, we believe that the aggregate net loss reserves at September 30, 2015 were adequate to cover claims for losses that had occurred as of that date, including both those known to us and those yet to be reported. However, as discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014, there are significant uncertainties inherent in the loss reserving process. It is therefore possible that management’s estimate of the ultimate liability for losses that had occurred as of September 30, 2015 may change, which could have a material effect on the Corporation’s results of operations and financial condition.

Changes in loss reserve estimates are unavoidable because such estimates are subject to the outcome of future events. Loss trends vary and time is required for changes in trends to be recognized and confirmed. Reserve changes that increase previous estimates of ultimate cost are referred to as unfavorable or adverse development or reserve strengthening. Reserve changes that decrease previous estimates of ultimate cost are referred to as favorable development or reserve releases.

We estimate that we experienced overall favorable development of about $475 million in the first nine months of 2015 and $180 million in the third quarter compared with favorable development of about $480 million and $155 million, respectively, in the same periods of 2014, on net loss reserves established as of the respective prior year end.

The favorable development in the first nine months of 2015 was primarily in the professional liability and commercial liability classes due to favorable loss experience related to accident years 2013 and prior. The favorable development in the first nine months of 2014 was primarily in the professional liability classes due to favorable loss experience related mainly to accident years 2010 and prior, and in the commercial liability classes due to favorable loss experience related mainly to accident years 2008 through 2012.


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Investment Results

Our ability to grow our property and casualty investment income is a function of several variables, including investable cash flows, available reinvestment rates and foreign currency to U.S. dollar exchange rates. The property and casualty subsidiaries’ investable cash flows are impacted by many factors, including operating activities, the payment of dividends to Chubb and the timing of maturities, calls and redemptions of fixed maturities. Economic conditions and national monetary policies both inside and outside the United States have resulted in a low interest rate environment in recent years that is expected to continue to adversely affect our ability to increase our investment income.

Property and casualty investment income before taxes decreased by 5% in the first nine months and third quarter of 2015 compared with the same periods in 2014. The decrease was due primarily to a decline in the average yield of our property and casualty subsidiaries’ investment portfolio and, to a lesser extent, the impact of foreign currency translation, partially offset by the impact of an increase in our average invested assets. The decrease in the average yield on the investment portfolio primarily resulted from lower reinvestment yields on securities that we purchased to replace fixed maturities that matured, were redeemed by the issuer or were sold since the third quarter of 2014. While the property and casualty subsidiaries generated substantial operating cash flows in the last three months of 2014 and the first nine months of 2015, average invested assets were impacted by substantial dividend distributions made by the property and casualty subsidiaries to Chubb during 2014 and the first half of 2015. As a result of the dividend distributions, our property and casualty subsidiaries held only a slightly higher amount of average invested assets in the first nine months of 2015 and in the third quarter compared with the same periods in 2014.

The effective tax rate on our investment income was 17.6% in the first nine months of 2015 compared with 18.1% in the same period of 2014. The effective tax rate on our investment income is lower than the U.S. statutory tax rate since a portion of our investment income is tax exempt interest income. The effective tax rate fluctuates as the proportion of tax exempt investment income relative to total investment income changes from period to period.

On an after-tax basis, property and casualty investment income decreased by 5% in the first nine months and 6% in the third quarter of 2015 compared with the same periods in 2014. The after-tax annualized yield on our property and casualty subsidiaries’ investment portfolio was 2.63% and 2.76% in the first nine months of 2015 and 2014, respectively.

Other Income and Charges

Other income and charges, which includes miscellaneous income and expenses of the property and casualty subsidiaries, was not significant in the first nine months of 2015 and 2014.


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Corporate and Other

Corporate and other comprises investment income earned on corporate invested assets, interest expense and other expenses not allocated to our operating subsidiaries and the results of our non-insurance subsidiaries.

Corporate and other produced a loss before taxes of $209 million in the first nine months of 2015 compared with a loss of $177 million for the same period of 2014. The higher loss for the first nine months of 2015 compared with the same period of 2014 was due primarily to Merger-related professional fee expenses of approximately $22 million incurred in the second and third quarters of 2015. The Corporation expects to continue to incur expenses relating to the Merger in future periods, which may have a material effect on the results of operations of the Corporation for the relevant period.

Realized Investment Gains and Losses

Net realized investment gains and losses were as follows:

 

     Periods Ended September 30  
     Nine Months     Third Quarter  
     2015     2014     2015     2014  
     (in millions)  

Net realized gains

        

Fixed maturities

   $ 27      $ 71      $ 15      $ 22   

Equity securities

     58        132        42        43   

Other invested assets

     77        153        51        45   
  

 

 

   

 

 

   

 

 

   

 

 

 
     162        356        108        110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other-than-temporary impairment losses

        

Fixed maturities

     (12     (4     (11       

Equity securities

     (37     (1     (15       
  

 

 

   

 

 

   

 

 

   

 

 

 
     (49     (5     (26       
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized investment gains before tax

   $ 113      $ 351      $ 82      $ 110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized investment gains after tax

   $ 75      $ 228      $ 54      $ 72   
  

 

 

   

 

 

   

 

 

   

 

 

 

The net realized gains and losses of other invested assets primarily include the aggregate of realized gain distributions to us from the private equity limited partnerships in which we have an interest and changes in our equity in the net assets of those partnerships based on valuations provided to us by the manager of each partnership. Due to the timing of our receipt of valuation data from the investment managers, the value of these investments and any related realized gains and losses are generally reported on a one quarter lag.

The net realized gains of the limited partnerships reported in the first nine months of 2015 primarily reflected the positive performance of the U.S. equity markets in the first six months of 2015 and the fourth quarter of 2014 and the positive performance of the equity markets outside the United States in


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the second quarter of 2015. The net realized gains of the limited partnerships reported in the first nine months of 2014 primarily reflected the positive performance of the global equity and high yield investment markets in the first six months of 2014 and the fourth quarter of 2013.

We have not yet received third quarter 2015 valuations from many of the limited partnerships. Based on the limited preliminary information we have received to date about the third quarter performance of some of the limited partnerships and the weak performance in the global equity markets in the third quarter, we may experience an overall decline in our equity in the net assets of these limited partnership investments, which would be reflected in our fourth quarter 2015 net realized investment gains and losses.

We regularly review invested assets that have a fair value less than cost to determine if an other-than-temporary decline in value has occurred. We have a monitoring process overseen by a committee of investment and accounting professionals that is responsible for identifying those securities to be specifically evaluated for a potential other-than-temporary impairment.

The determination of whether a decline in value of any investment is temporary or other than temporary requires the judgment of management. The assessment of other-than-temporary impairment of fixed maturities and equity securities is based on both quantitative criteria and qualitative information. A number of factors are considered including, but not limited to, the length of time and the extent to which the fair value has been less than the cost, the financial condition and near term prospects of the issuer, whether the issuer is current on contractually obligated interest and principal payments, general market conditions and industry or sector specific factors. The decision to recognize a decline in the value of a security carried at fair value as other than temporary rather than temporary has no impact on shareholders’ equity.

In determining whether fixed maturities are other than temporarily impaired, we are required to recognize an other-than-temporary impairment loss when we conclude that we have the intent to sell or it is more likely than not that we will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value or it is likely we will not recover the entire amortized cost value of an impaired security. If we have the intent to sell or it is more likely than not that we will be required to sell an impaired fixed maturity before the security recovers to its amortized cost value, the security is written down to fair value and the entire amount of the writedown is included in net income as a realized investment loss. For all other impaired fixed maturities, when the impairment is determined to be other than temporary, the impairment loss is separated into the amount representing the credit loss and the amount representing the loss related to all other factors. The amount of the impairment loss that represents the credit loss is included in net income as a realized investment loss and the amount of the impairment loss that relates to all other factors is included in other comprehensive income.

In determining whether equity securities are other than temporarily impaired, we consider our intent and ability to hold a security for a period of time sufficient to allow us to recover our cost. If a decline in the fair value of an equity security is deemed to be other than temporary, the security is written down to fair value and the amount of the writedown is included in net income as a realized investment loss.


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Capital Resources and Liquidity

Capital resources and liquidity represent a company’s overall financial strength and its ability to generate cash flows, borrow funds at competitive rates and raise new capital to meet operating and growth needs.

Capital Resources

Capital resources provide protection for policyholders, furnish the financial strength to support the business of underwriting insurance risks and facilitate continued business growth. At September 30, 2015, the Corporation had shareholders’ equity of $16.4 billion and total debt of $3.3 billion.

Management regularly monitors the Corporation’s capital resources. In connection with our long term capital strategy, from time to time Chubb may contribute capital to its property and casualty subsidiaries. In addition, in order to satisfy capital needs as a result of any rating agency capital adequacy or other future rating issues, or in the event we were to need additional capital to make strategic investments in light of market opportunities, we may take a variety of actions, which could include the issuance of additional debt and/or equity securities. We believe that our strong financial position and current debt level provide us with the flexibility and capacity to obtain funds externally through debt or equity financings on both a short term and long term basis. Pursuant to the Merger Agreement, Chubb, without the prior written consent of ACE, cannot take certain actions until the effective time of the Merger or termination of the Merger Agreement, including incurring any additional indebtedness, issuing equity, selling any material properties or assets, acquiring assets or making, or committing to make, capital expenditures, in each case except as permitted pursuant to the Merger Agreement.

In January 2014, the Chubb Board of Directors (the Board) authorized the repurchase of up to $1.5 billion of Chubb’s common stock. Repurchases under this authorization were completed in January 2015. On January 29, 2015, the Board authorized the repurchase of up to $1.3 billion of Chubb’s common stock. During the first six months of 2015, under these two authorizations we repurchased 6,046,623 shares of Chubb’s common stock in open market transactions at a cost of $604 million. During the second quarter of 2015, Chubb suspended repurchases of its common stock in connection with it agreeing to be acquired by ACE, which was announced on July 1, 2015. As of September 30, 2015, $749 million remained under the January 2015 authorization.

Ratings

Chubb and its property and casualty insurance subsidiaries are rated by major rating agencies. These ratings reflect the rating agency’s opinion of our financial strength, operating performance, strategic position and ability to meet our obligations to policyholders.


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Credit ratings assess a company’s ability to make timely payments of interest and principal on its debt. The following table presents Chubb’s credit ratings as determined by the major independent rating organizations as of November 4, 2015.

 

     A.M. Best    Standard & Poor’s    Moody’s    Fitch

Senior unsecured debt

   aa    A    A2    A+

Junior subordinated capital securities

   a+    BBB+    A3    A-

Commercial paper

   AMB-1+    A-1    P-1    F1+

Since the announcement of the Merger, the four rating agencies revised either their credit rating of Chubb or their outlook on the credit rating. On July 1, 2015, Fitch placed the rating on “Rating Watch Negative.” On July 1, 2015, Standard & Poor’s placed the rating on “CreditWatch with negative implications” and then on October 26, 2015, subsequent to the announcements of Chubb and ACE satisfying certain closing conditions and ACE’s offering of $5.3 billion in senior unsecured notes to fund a portion of the Merger consideration, lowered the rating to A from A+ with an outlook of “negative.” On July 2, 2015, A.M. Best placed the rating “under review with negative implications.” On July 2, 2015, Moody’s affirmed the rating with a stable outlook but on October 27, 2015 placed the rating “On Review for Possible Downgrade” with an outlook of “Rating Under Review.”

Financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders. The following table presents our property and casualty subsidiaries’ financial strength ratings as determined by the major independent rating organizations as of November 4, 2015.

 

     A.M. Best      Standard & Poor’s      Moody’s      Fitch  

Financial strength

     A++         AA         Aa2         AA   

Since the announcement of the Merger, Chubb’s property and casualty subsidiaries’ financial strength ratings were affirmed by the four rating agencies, with two revising their outlook. On July 1, 2015, Standard & Poor’s revised its outlook on the rating to “negative” and, on July 2, 2015, A.M. Best placed the rating “under review with negative implications.”

The rating agencies may take additional actions, which could be positive or negative, prior to or after the closing of the Merger.

Ratings are an important factor in establishing our competitive position in the insurance markets. There can be no assurance that our ratings will continue for any given period of time or that they will not be changed.

If our credit ratings were downgraded, we might incur higher borrowing costs and might have more limited means to access capital. A downgrade in our financial strength ratings could adversely affect the competitive position of our insurance operations, including a possible reduction in demand for our products in certain markets.


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Liquidity

Liquidity is a measure of a company’s ability to generate sufficient cash flows to meet the short and long term cash requirements of its business operations.

The Corporation’s liquidity requirements in the past have generally been met by funds from operations and we expect that funds from operations will continue to be sufficient to meet such requirements in the future. Liquidity requirements could also be met by funds received upon the maturity or sale of marketable securities in our investment portfolio. Chubb also has the ability to borrow under its $500 million credit facility and we believe we could issue debt or equity securities, subject, in each case, to obtaining ACE’s prior written consent as required under the terms of the Merger Agreement.

Our property and casualty operations provide liquidity in that insurance premiums are generally received months or even years before losses are paid under the policies purchased by such premiums. Cash receipts from operations, consisting of insurance premiums and investment income, provide funds to pay losses, operating expenses and dividends to Chubb. Cash receipts in excess of required cash outflows can be used to build the investment portfolio with the expectation of generating additional investment income in the future.

Our property and casualty subsidiaries maintain substantial investments in highly liquid, short term marketable securities. Accordingly, we do not anticipate selling long term fixed maturities to meet any liquidity needs.

Chubb’s liquidity requirements primarily include the payment of dividends to shareholders and interest and principal on debt obligations. The declaration and payment of dividends to Chubb’s shareholders is at the discretion of Chubb’s Board and depends upon many factors, including our operating results, financial condition, capital requirements and any regulatory constraints.

As a holding company, Chubb’s ability to continue to pay dividends to shareholders and to satisfy its debt obligations relies on the availability of liquid assets, which is dependent in large part on the dividend paying ability of its property and casualty subsidiaries. The timing and amount of dividends paid by the property and casualty subsidiaries to Chubb may vary from year to year. In the United States, our property and casualty subsidiaries are subject to laws and regulations in the jurisdictions in which they operate that restrict the amount and timing of dividends they may pay within twelve consecutive months without the prior approval of regulatory authorities. The restrictions are generally based on net income and on certain levels of policyholders’ surplus as determined in accordance with statutory accounting principles. Dividends in excess of such thresholds are considered “extraordinary” and require prior regulatory approval.

During the first nine months of 2015, the property and casualty subsidiaries paid dividends of $1,255 million to Chubb. As of September 30, 2015, the maximum aggregate dividend distribution that may be made by the subsidiaries to Chubb during the remainder of 2015 without prior regulatory approval was approximately $600 million.


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On October 21, 2015, a property and casualty subsidiary of Chubb declared a dividend to Chubb of $600 million to be paid on December 23, 2015, which is not considered extraordinary and, therefore, is not subject to regulatory approval.

Pursuant to the Merger Agreement, Chubb has agreed to use its reasonable best efforts to have available $3 billion in cash and cash equivalents prior to the effective time of the Merger. It is expected that, immediately after the effective time of the Merger, Chubb will pay to its shareholder after the Merger a dividend of $3 billion that will be used by ACE in connection with the funding of a portion of the cash consideration in the Merger. A portion of the $3 billion in cash and cash equivalents that may be held by Chubb prior to the effective time of the Merger will be from an extraordinary dividend to be paid to Chubb by a property and casualty subsidiary. Accordingly, on October 21, 2015, the property and casualty subsidiary declared a dividend to be paid to Chubb prior to the closing of the Merger, on such date after December 23, 2015 but on or prior to March 31, 2016, and in an amount to be determined at that time but not to exceed $1.4 billion. Since this dividend is considered extraordinary, it required regulatory approval, which has been received. Chubb expects that the balance of the $3 billion in cash and cash equivalents that may be held by Chubb prior to the effective time of the Merger will be cash and cash equivalents otherwise held by Chubb at that time.

The Corporation’s strong underwriting and investment results generated substantial positive operating cash flows of